Leverage & Pip Value

[acosma]

it's one year that I trade in forex but I still have doubts about how leverage affects pip value:

I have one alpari account with leverage 1:200 and other alpari demo account with default leverage 1:500

 

On both account I use an EA that have the same setting:

stoploss is set at 38 pips with fixed lot at 0.05

 

Well, I don't understand why I lost the same amount of money on both account with the same stoploss, the same fixed lots but DIFFERENT LEVERAGE!!!

 

account 1: leverage (1:200)

pair GBPUSD

fixed lot 0.05

entry price 1.5436

stoploss hit at 1.5398 (38pips)

money lost: 14.64 EUR

 

 

account 2: leverage (1:500)

pair GBPUSD

fixed lot 0.05

entry price 1.5436

stoploss hit at 1.5398 (38pips)

money lost: 14.64 EUR

 

I don't understand the same money lost at the same fixed lots 0.05

the lost on the 2nd account should be much more than the one on the 1st account ? is it not true ?

 

I use to change leverage and increase it when there is a maximum lot size that the broker has set for the total position opened.

 

for example total opened position lot size permitted for alpari micro account is 2.0 standard lots.

So to not go over this level of 2.0 standard lot I can double leverage from 1:100 to 1:200

so for example I want to risk 10% max of my balance

 

to risk 10% at 1:100 I have to open for example a position of 1.0 lotsize

at 1:200 to risk the same 10% I have to open half the position size so 0.5 instead of 1.0

 

so I don't understand how it could possible THE LOST IS THE SAME AT DIFFERENT LEVERAGE

 

WHAT'S WRONG ?

 

or maybe a mistake of the broker ? it seems that it's always 1:100 even if you change your leverage and increase it.

 

Please someone could explain this to me ?

[soundfx]

Hi acosma,

 

I don't think simply changing the leverage in the standard MT4 demo account setup screen works. This is from the Alpari FAQ:

 

"How do I change leverage on my demo account?

To change leverage on your demo account please contact Client Services Team on +44 (0)20 7426 2900 or send an email to [email protected]"

[acosma]

Hi soundfx, thanks for your answer but is it correct what i'm saying ? lotsize is inversely proportional to leverage, right ?

example:

pair: GBP/USD

balance: 1000

risk: 3.0%

stoploss: 38

leverage: 100

current: EUR/USD Ask price: 1.2295

lotsize: 0.097 rounded to 0.1

risk money: € 30.00

 

pair: GBP/USD

balance: 1000

risk: 3.0%

stoploss: 38

leverage: 200

current: EUR/USD Ask price: 1.2295

lotsize: 0.049 rounded to 0.05 (about half the one above)

risk money: € 30.00 (same risk money)

 

is it right or I'm wrong ?

 

"How do I change leverage on my demo account?

To change leverage on your demo account please contact Client Services Team on +44 (0)20 7426 2900 or send an email to [email protected]

this is true for demo account only live account can be changed from a specific page on alpari web site.

[JimJamBonks]

Changing your broker leverage has nothing to do with the position size you choose and thus your true leverage.

 

Broker Leverage is merely a measure of how many contracts you can command per amount of your account . So 100:1 Leverage is a ratio of account size (margin) to contract size. ie a leverage of 100:1 allows a margin of $1000 in account to control 1 standard contract of $100,000 equal to $10 per pip. Move that up to 500:1 and it's $50 per pip. The fact that you CAN trade this high doesn't mean you should. Anybody actually trading at these levels of leverage is mad and might as well spend their money on drugs as it'll only be a few minutes before their account is empty anyway. Even True Leverage above 5:1 before you have a solid grasp of your trade expectancy is asking to set fire to your account. There are countless places that explain this on the net - why not start here before you risk another penny. :o)

 

http://www.babypips.com/school/leverage_the_killer.html

 

You're really very naughty trading real money without a solid grasp of this beforehand. Brokers absolutely rely on people doing this kind of stuff. It's easy money to them as unwitting traders shoot-up their own accounts. PROTECT YOUR CAPITAL - THAT MEANS UNDERSTANDING THE MECHANISMS FIRST.

[soundfx]

Hi acosma,

 

I always use 1:100 leverage, so I've not needed to looked at this in depth before.

 

However your understanding is the same as mine that lot size should be inversely proportional to leverage.

[iwjw]

If you're talking about absolute $ risk it has nothing to do with leverage

The leverage defines how much margin will be used to open a position

If 1:200 you'll need at least $100000/200 =$500 free margin to open a position of 1 standard lot

But the money you risk for the trade is always the same regardless of the leverage

If you define your risk in percentage of margin, then that's an other story...here comes leverage into play

In this case your possible loss is not limited to any fixed $amount. You are only limiting the percentage of free margin you are allocationg for the trade

[acosma]

yes i know that The leverage defines how much margin will be used to open a position,

but in the preceding example to risk 3% (30 EUR) at leverage 1:200 which is the correct lot size 0.05 or 0.1 ???

for me it's 0.05 half the lotsize that could be at 1:100, right ???

[JimJamBonks]

Forget the leverage - it's confusing things. Let's just assume you have ample broker leverage to work your margin..

 

When you quote risk 3% I assume you mean 3% of your account size. Lets say you have an account of $1000 then 3% equates to $30. You then need to divide $30 by your stop loss size to arrive at your position size. So if your stop loss is 30 pips then 30 pips divided by $30 risked (3% of $1000) equals 1 mini lot ($1 per pip) or 10 micro lots position size. You can work on this basis up and down your account size and stop size. The most important bit is to maintain your dollar risk to a fixed amount for every trade married to an appropriate stop size to find the position size. The position size (the $ amount per pip movement absolutely has to be appropriate to your account size and stop size)..

 

This is all very confusing isn't it. I have an absolute understanding of it in my head but it doesn't come out quite so gracefully.. :)

[iwjw]

yes i know that The leverage defines how much margin will be used to open a position,

but in the preceding example to risk 3% (30 EUR) at leverage 1:200 which is the correct lot size 0.05 or 0.1 ???

for me it's 0.05 half the lotsize that could be at 1:100, right ???

 

What's your definition of risk?

If the trade gets stopped out your loss is limited to 3%=$30?

If so, it's got nothing to do with leverage

[iwjw]

Example:

Short eurusd @1.3000, SL=38pips

a) you don't want to risk more than 3% of your balance = $30

your tolerated risk/pip is $30/38pips=0.79 $/pip rounded

that means, your max lotsize for this trade is 0.079 lots

if you get stopped out you lose 0.79*38=$30 rounded

 

b) you are risking 3% of the availlable margin = $30

b1) your leverage is 1:200

margin requirement for 1 lot is 100000/200=$500

you want to risk $30 -> 30/500=0.06 lots

Your risk now is $0.6/pip

In case of SL you would lose 0.6*38=$22.80

b2) your leverage is 1:100

margin requirement for 1 lot is 100000/100=$1000

you want to risk $30 -> 30/1000=0.03 lots

Your risk now is $0.3/pip

In case of SL you would lose 0.3*38=$11.40