{"id":209,"date":"2013-02-13T07:05:50","date_gmt":"2013-02-13T07:05:50","guid":{"rendered":"http:\/\/pakeagle.com\/forex\/?p=209"},"modified":"2013-02-13T07:05:50","modified_gmt":"2013-02-13T07:05:50","slug":"forex-leverage-margin","status":"publish","type":"post","link":"http:\/\/www.pakistanoffice.com\/live\/fee-urdu-forex-training-course-in-pakistan\/forex-leverage-margin","title":{"rendered":"Forex Leverage & Margin"},"content":{"rendered":"

\"leverage-arm-wrestle\"<\/a>Here’s a chart of how much your account balance changes if prices moves depending on your leverage.<\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n\n\n\n\n\n\n\n\n\n\n\n
\n
\n

Leverage<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

% Change in Currency Pair<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

% Change in Account<\/b><\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

100:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

100%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

50:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

50%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

33:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

33%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

20:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

20%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

10:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

10%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

5:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

5%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

3:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

3%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

1:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n

\n
\n

1%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Let’s say you bought USD\/JPY and it goes up by 1% from 120.00 to 121.20. If you trade one standard $100K lot, here is how leverage would affect your return:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
\n
\n

Leverage<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

Margin Required<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

% Change in Account<\/b><\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

100:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$1,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+100%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

50:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$2,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+50%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

33:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$3,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+33%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

20:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$5,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+20%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

10:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$10,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+10%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

5:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$20,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+5%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

3:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$33,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+3%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

1:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$100,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

+1%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Let’s say you bought USD\/JPY and it goes down by 1% from 120.00 to 118.80. If you trade one standard $100K lot, here is how leverage would affect your return (or loss):<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
\n
\n

Leverage<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

Margin Required<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

% Change in Account<\/b><\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

100:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$1,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-100%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

50:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$2,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-50%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

33:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$3,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-33%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

20:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$5,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-20%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

10:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$10,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-10%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

5:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$20,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-5%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

3:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$33,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-3%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

1:1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$100,000<\/p>\n<\/div>\n<\/td>\n

\n
\n

-1%<\/p>\n<\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The more leverage you use, the less “breathing room” you have for the market to move before a margin call.<\/p>\n

You’re probably thinking, “I’m a day trader, I don’t need no stinkin’ breathing room. I only use 20-30 pip stop losses.”<\/p>\n

Okay, let’s take a look:<\/p>\n

Example #1 <\/b><\/p>\n

You open a mini account with $500 which trades $10K mini lots and only requires .5% margin.<\/p>\n

You buy 2 mini lots of EUR\/USD. Your true leverage is 40:1 ($20,000 \/ $500). You place a 30-pip stop loss and it gets triggered. Your loss is $60 ($1\/pip x 2 lots).<\/p>\n

You’ve just lost 12% of your account ($60 loss \/ $500 account). Your account balance is now $440.<\/p>\n

You believe you just had a bad day. The next day, you’re feeling good and want to recoup yesterday losses, so you decide to double up and you buy 4 mini lots of EUR\/USD. Your true leverage is about 90:1 ($40,000 \/ $440). You set your usual 30-pip stop loss and your trade loses. Your loss is $120 ($1\/pip x 4 lots).<\/p>\n

You’ve just lost 27% of your account ($120 loss\/ $440 account). Your account balance is now $320.<\/p>\n

You believe the tide will turn so you trade again. You buy 2 mini lots of EUR\/USD. Your true leverage is about 63:1. You set your usual 30 pip stop loss and lose once again! Your loss is $60 ($1\/pip x 2 lots).<\/p>\n

You’ve just lost almost 19% of your account ($60 loss \/ $320 account). Your account balance is now $260.<\/p>\n

You’re getting frustrated. You try to think what you’re doing wrong. You think your setting your stops too tight.<\/p>\n

The next day you buy 3 mini lots of EUR\/USD. Your true leverage is 115:1 ($30,000 \/ $260). You loosen your stop loss to 50 pips. The trade starts going against you and it looks like you’re about to get stopped out yet again!<\/p>\n

But what happens next is even worse! You get a margin call!<\/p>\n

Since you opened 3 lots with a $260 account, your Used Margin was $150 so your Usable Margin was a measly $110. The trade went against you 37 pips and because you had 3 lots opened, you get a margin call. Your position has been liquidated at market price.<\/p>\n

The only money you have left in your account is $150, the Used Margin that was returned to you after the margin call.<\/p>\n

After four total trades, your trading account has gone from $500 to $150. A 70% loss! It won’t be very long until you lose the rest.<\/p>\n\n\n\n\n\n\n\n
\n
\n

Trade #<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

Starting Account Balance<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

# Lots of Used<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

Stop Loss (pips)<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

Trade Result<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

Ending Account Balance<\/b><\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

1<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$500<\/p>\n<\/div>\n<\/td>\n

\n
\n

2<\/p>\n<\/div>\n<\/td>\n

\n
\n

30<\/p>\n<\/div>\n<\/td>\n

\n
\n

-$60<\/p>\n<\/div>\n<\/td>\n

\n
\n

$440<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

2<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$440<\/p>\n<\/div>\n<\/td>\n

\n
\n

4<\/p>\n<\/div>\n<\/td>\n

\n
\n

30<\/p>\n<\/div>\n<\/td>\n

\n
\n

-$120<\/p>\n<\/div>\n<\/td>\n

\n
\n

$320<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

3<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$320<\/p>\n<\/div>\n<\/td>\n

\n
\n

2<\/p>\n<\/div>\n<\/td>\n

\n
\n

30<\/p>\n<\/div>\n<\/td>\n

\n
\n

-$60<\/p>\n<\/div>\n<\/td>\n

\n
\n

$260<\/p>\n<\/div>\n<\/td>\n<\/tr>\n

\n
\n

4<\/b><\/p>\n<\/div>\n<\/td>\n

\n
\n

$260<\/p>\n<\/div>\n<\/td>\n

\n
\n

5<\/p>\n<\/div>\n<\/td>\n

\n
\n

30<\/p>\n<\/div>\n<\/td>\n

\n
\n

Margin Call<\/p>\n<\/div>\n<\/td>\n

\n
\n

$150<\/p>\n<\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

A four trade losing streak is not uncommon. Experienced traders have similar or even longer streaks. The reason they’re successful is because they use low leverage. Most cap their leverage at 5:1 but rarely go that high and stay around 3:1.<\/p>\n

The other reason experienced traders succeed is because their accounts are properly capitalized!<\/p>\n

While learning technical analysis, fundamental analysis, sentiment analysis, building a system, trading psychology is important, we believe the biggest factor on whether you succeed as a forex trader is making sure you capitalize your account sufficiently and trade that capital with smart leverage.<\/p>\n

Your chances of becoming successful are greatly reduced below a minimum starting capital. It becomes impossible to mitigate the effects of leverage on too small an account.<\/p>\n

Low leverage with proper capitalization allows you to realize losses that are very small which not only lets you sleep at night, but allows you to trade another day.<\/p>\n

Example #2<\/b><\/p>\n

Bill opens a $5,000 account trading $100,000 lots. He is trading with 20:1 leverage. The currency pairs that he normally trades moves anywhere from 70 to 200 pips on a daily basis. In order to protect himself, he uses tight 30 pip stops. If prices goes 30 pips against him, he will be stopped out for a loss of $300.00. Bill feels that 30 pips is reasonable but he underestimates how volatile the market is and finds himself being stopped out frequently.<\/p>\n

After being stopped out four times, Bill has had enough. He decides to give himself a little more room, handle the swings, and increases his stop to 100 pips.<\/p>\n

Bill’s leverage is no longer 20:1. His account is down to $3,800 (because of his four losses at $300 each) and he’s still trading one $100,000 lot. His leverage is now over 26:1.<\/p>\n

He decides to tighten his stops to 50 pips. He opens another trade using two lots and two hours later his 50 pip stop loss is hit and he losses $1,000. He now has $2,800 in his account. His leverage is over 35:1.<\/p>\n

He tries again with two lots. This time the market goes up 10 pips. He cashes out with a $200 profit. His account grows slightly to $3,000.<\/p>\n

He opens another position with two lots. The market drops 50 points and he gets out. Now he has $2,000 left.<\/p>\n

He thinks “What the hell” and opens another position. The market proceeds to drop another 100 pips and because he has $1,000 locked up as margin deposit, he only has $1,000 margin available, so he receives a margin call and his position is instantly liquidated.<\/p>\n

He now has $1,000 left which is not even enough to open a new position.<\/p>\n

He lost $4,000 or 80% of his account with a total of 8 trades and the market has only moved 280 pips. 280 pips! The market moves 280 pips pretty darn easy.<\/p>\n

Are you starting to see why leverage is the top killer of forex traders?<\/p>\n","protected":false},"excerpt":{"rendered":"

Here’s a chart of how much your account balance changes if prices moves depending on your leverage.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[194],"tags":[45],"_links":{"self":[{"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/posts\/209"}],"collection":[{"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/comments?post=209"}],"version-history":[{"count":0,"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/posts\/209\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/media?parent=209"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/categories?post=209"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.pakistanoffice.com\/live\/wp-json\/wp\/v2\/tags?post=209"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}