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Jun 5th 2007
Leverage Broken Down
What do these numbers mean? Let us take 100:1 for an example. I’m going to make this as simple as possible with only one formula used. Amount you want to trade divided by the leverage number.
First number (Left Number) : 100. This is the number of times the broker is willing to “Lend†you in order for you to buy/sell a position. Take this number and divide the amount you want to trade with. Let’s say, 1 Standard lot ($100,000). $100,000 / 100 = $1,000. This would mean that you would need $1,000 at least to open 1 standard lot. Now, you CAN’T trade 100:1 with only $1,000 since that $1,000 is already being used as collateral for the trade, you would need additional cash in your account to cover the inevitable drawdowns.
Quick Table: What’s needed in order to trade 1 Standard Lot (100,000)
1:1 = $100,000
2:1 = $50,000
10:1 = $10,000
20:1 = $5,000
100:1 =$1,000
200:1 = $500
400:1 = $250
500:1 = $200
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13 Responses to “Quick look at Leverage”
- 1 Pingback on Jun 5th, 2007 at 10:20 am
- 2 Pingback on Jun 5th, 2007 at 2:22 pm
- 3 Pingback on Sep 30th, 2007 at 2:18 am
- 4 Pingback on Jun 24th, 2008 at 7:31 pm
Let’s say you have a total of $1,000 in your account. If you open a position at 100:1 and you lose the entire thing, does that mean you now owe the broker $99,000? Is their any possibility or set of circumstances in which this scenario (owe the broker money) could happen?
There’s a minimum margin and it differs from broker to broker (10% - 30%). You will not be able to lose the entire thing. Your margin is there to ensure that; Unless your trade is really that horrible that the broker has not closed your position in time and it eats over your margin (something horribly wrong).
So, if I understand you correctly, I would not be allowed to open a single postion with my entire account? If the margin were 10% I’d only be able to place $100 on any given trade?
Hi Opie,
The broker may allow you to buy 1 standard lot, but as the position starts to go against you, the broker will close out the trade for you at a certain point.
For instance. You have $1,000 in your account and you open a long position on the Euro at 100:1 leverage. This means that you will be earning $10 for ever pip the trade goes in your direction and losing $10 for every pip the trade goes against you.
when you open your trade you will automatically see a -$20 to -$40 dollars in your account depending on the spread your broker offers.
Now as the trade moves, your accounts unrealized P/L will go up and down depending on the direction of the move.
Let’s assume you get in and the market goes against you 80 points. Your account will now show an unrealized P/L of -$800 (80 pips X $10)
Some brokers might do what is called a margin call. What happens is that you will be required to add more funds to your account or the broker is going to start closing out position until your margin levels go up again.
So Opie, That was a long way of saying Yes, you can open up a position, but you better be right. Depending on the pair you trade, your $1,000 can get eaten up very quickly.
I hope this was helpful
Paul
http://www.myhyicommunity.com
Yes Paul, that was very helpful. Very clearly explained. Thank you.
The broker must have an automated system to keep track of all open positions, correct? I can imagine a lax (or unscrupulous) broker allowing my account to drop below $1,000 before executing a margin call. At that point I’d be obliged to deposit additional funds, correct? Or am I being needlessly paranoid?
BTW Jude, it says there are 6 responses to this post but I only see four. Is there another section where replies can’t be viewed!?
The two pingbacks below are considered responses as well opie
It’s to be noted that some broker allow you to trade 0.10 or even 0.01 lot, meaning that you can trade with less than wath is mentionned above or minmize the risk of each trade.
Good point brought out by Gray. Personally I’m trading live at 0.10 lots with 1:100.
I’m currently trading 1k lots in accounts with various margins at 400:1. So a minimum amount to start a live account is generally $2,000 - $2,500 depending on the broker. Lots of 100 in a micro account and you can open with as low as $250.
Doing very well. I hold my positions though - I may not reallocate for months, so I earn interest every day, and I always buy low and sell high. It takes me only a few minutes a day. More of a long term investment than traditional directional/day trading. But I sleep really well at night…
Yes, the trading platform software itself “monitors” the open positions - buy and sell points (stop limits) are executed automatically when hit.