Standard forex leverage
Overall, I think that restricting the choices of US traders is very bad business and not competitive with the rest of the world. Many formerly US retail traders have ended up moving their accounts overseas to enjoy forex without as many restrictions. This limitation in US leverage is just one of many limitations e.
The real truth of the matter is that high brokerage leverage in and of itself is not dangerous.
XM Margin Calculator
Because forex leverage does not change the value of the lot, and you have a choice to trade different lot sizes, it is not necessarily more risky to have more leverage, as it would be with futures, where you cannot change the lot size. Higher leverage just confers the ability to trade larger lots or more lots with less capital.
In between your minimum and maximum use of leverage and lot sizing is a vast range of flexibility. Having more potential for leverage can be dangerous for greedy traders, but every greedy trader should have a chance to hang himself and remove himself from the marketplace. Yes, especially for dumb, greedy traders who use too much of the leverage available to them. I believe that the flexible leverage AND flexible lot sizing conferred by Forex can allow most traders a far safer trading arena than either stocks or futures. A futures trader must use the leverage geared for the contract specified, which can be quite high and dangerous.
A Forex trader, in contrast, can safely trade lots and leverage in proportion to his account size. Such a trader can then reserve the potential leverage for diversification, opportunity or emergency. Let us go over each one. By diversification, we mean the potential to have concurrent trades that employ different strategies on different markets. By opportunity, I mean that there may be times in the market when you discover an amazing opportunity and you want to capitalize on it with greater leverage or more positions.
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If you think that the odds are greatly in your favor, the leverage is there for you to use. You have the potential to strike big and hard. Then there are cases of hardship. The greater leverage capacity is thus allowing you to maintain your initial lot sizing as your account drops.
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Compare that to stocks, where every percentage decline in your account would force you to trade block shares of smaller and smaller stock values, which would make it harder and longer to climb your way out of your drawdown. In the end, your brokerage leverage determines your maximum potential leverage, and it is in your best interest to trade the smallest degree of it, reserving the rest for plays of diversification, opportunity and hardship.
The capacity to make another trade is determined by the free margin which is the equity from which the currently used margin is subtracted. Margin or Used Margin The amount of money in your account that is currently used in open trades. More precisely, the formula is as follows:. Usable or Free Margin: It is the amount of money in your account minus the margin or used Margin. We have already discussed what Margin and Free Margin is. What is the meaning of this? Let us break down the above screenshot:. Balance: In Forex it is not a call from your broker to add more funds, as it is with stocks and futures.
See table above. The greater the leverage used on any particular trade, the more risk capital you have at risk, and the more likelihood of a margin call. You should fully understand how your margin works, and be sure to read the margin agreement between you and your broker. It is always a good idea to keep an eye on your Used Margin and Free Margin to ensure you are not using too much margin and that you have plenty of free margin left. Soon after your positions will be closed out usually one by one, starting from the least profitable until the minimum margin requirement is met.
You have at least some money left in the account in an extreme adverse market move. This broker is being very generous as to how it handles your abuse of margin limits. By having your margin call level set at these lower levels, your risk of having a margin call is pushed further away which can be good if you are trading with grid or martingale systems.
Monitoring your Risk Exposure
However, if you are not careful enough, these more generous margin call brokers can leave you with very little left in your account if the market moves strongly against you. At this point, his margin bar has turned red as a warning. Depending on the margin policy of the broker, his positions could have been totally or partially liquidated.
Poor Jeff, he took advantage of too much leverage and got himself in trouble. Jeff would then be able to fight another day. Most successful traders are careful, cautious, and objective when analyzing the market and seeking a trading opportunity. They rarely use more than leverage, they always use reasonable stop losses and they use effective lot sizing models.
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Novice traders, no matter how well schooled and prepared, often commence their career with a shaky start. They soon realize that not every trade makes money, and in fact most trades lose. Winning and losing trades often come in streaks, with more losing streaks than winning streaks. For a while everything works out, and then all trades turn sour. It is extremely important that you do not get too confident with a couple of winners, or get too despondent with a series of losing trades.
There are some common mistakes that the rookie trader makes. The biggest mistake is trading too big for the size of the account. If a move against you of 50 pips or less is going to cause you to liquidate your position or worse yet, the margin clerk does it for you, then you are trading too big. For new traders, it is generally better to trade a smaller unit size with a wider stop.
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Leverage up to 1:2000
Display tool title. Leverage Lots trade size You must enter a valid number.
Contract Size of 1 Lot. Deposit amount to open the trade View image. Ultimately, margin calls can be effectively avoided by using far less than available leverage to make your trades and monitoring the account balance on a regular basis. It has often been suggested that one should use stop-orders on every position to limit risk, and these can be helpful, but keeping the leverage size low relative to your account balance is the best money management strategy.
Conclusion Most successful traders are careful, cautious, and objective when analyzing the market and seeking a trading opportunity. Is this article helpful? Prev Next. You might also like to read:. Share this page using your affiliate referral link Academy Home. At the same time, trading CFDs when opening this type of account is not necessary.