On our first Youtube video, I have mentioned Leverage in passing telling you to choose anything from the drop down as it can be edited anyway later on (will also teach you how it can be edited). Come later on you’d think, what Leverage to choose for your actual regular trading?
Here’s the discussion.
First thing, let’s get to know Leverage. Babypips already got us covered. But I’ll try to make it simpler.
Max Leverage
This is what the broker offers you. In this case, it’s what XM is willing to offer you and that’s up to 888:1 ratio. Luckily in XM, it can be edited.
1. Just log-in to your XM account
2. Click Account and go to Change Leverage
It’s important! With the help of Max Leverage, you may control $50,000 despite just having $1,000 in your Account Balance (50:1, Account Balance x the ratio).
And from here, your Margin Requirement will also be computed. Margin, on the other hand, is like a security for you to execute trades. You are borrowing from the broker therefore, they require a part of your Account while they put up the rest of the trade amount.
A 50:1 ratio requires 2% (computed 1 over 50) while a 200:1 requires a 0.5% (1 over 200).
There are Forex Calculator apps for faster computation.
Example as seen in the photo, enter the currency pair you wish to trade, the trade size or position size (in photo, size is in Micro Lot instead of Standard), and the Leverage. Click calculate and you get around $22 as a Required Margin for that trade.
You may think that $22 is a meager part of your $1,000 Balance.
But, there’s such thing as Used Margin that maybe eating off the breathing space of your Balance.
Let’s learn this in True Leverage.
True Leverage
It reflects the ratio between your trade size and your Account Balance.
For example: with a $1,000 Account Balance, you trade EurUsd at price $1 in 0.10 standard lot (this is equivalent to 10,000 units) thus, your trade size is $10,000 in a ratio of 10:1 (trade size over Account Balance).
This ratio, on the other hand, changes every time you execute another trade. Because this would take additional trade size and dollar value affecting Margin and god forbid, your Margin Call. It’s when your trade exhausted your Margin (reflected in Used Margin) and exceeded your Usable Margin (or in other term, Free Margin). Likely, this is what you’re warned about.
In practice, I think you would concern yourself more with the Margin Call than the True Leverage ratio. So, I made an excel based on the computation in Babypips.
In the photo example, we have the following Margin Call based on Pips movement.
Executing 2 trades in a 100:1 Max Leverage would take you 400 Pip movement to trigger Margin Call and automatically close your worst losing trade hopefully freeing up the Usable Margin.
Meanwhile, 8 trades in the same 100:1 Max Leverage would only take 25 Pip movement.
Remember a Forex wisdom somewhere telling us to trade less and choose quality over quantity? This is why.
"Quality
over Quantity."
Let’s see another example.
Executing 2 trades in a 888:1 Max Leverage would take 488 Pips to Margin Call while 8 trades take 113 Pips. Hmm, great Forex weapon, isn’t it? BUT I personally think it only works if you know what you’re doing and carefully plan your trades.
I mean, I got these much breathing space for the Margin BECAUSE I highly consider my TRADE SIZE. There it is, that’s the key! Well, it’s more like the sheath to this sword. Blade wouldn’t hurt your hand if used correctly. With this and other risk management strategy then, you would be able to handle this sword good enough.
Happy trading everyone!
Sincerely,
@marilesaca || Trading Kitten :3
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Catch you on the next Forex Journey ;)
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