Leverage and position sizing - page 2
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Think of it in this way; If the the total stop-loss risk of all your positions is less than your current balance, then it will be equivalent to trading on a 1:1 leverage account. It is only when your stop-loss risk is more than your balance, that the leverage considerations come into play. By stop-loss risk, I mean the risk of exit rules you impose on positions whether they be broker side stop-loss or virtual/stealth stop-loss exit rules.
Please disregard my comment above. I did not do a good job of explaining myself. One has to first subtract the required margin for the open volume from the current balance (aka Free Margin).
Think of it in this way; If the the total stop-loss risk of all your positions is less than your current balance, then it will be equivalent to trading on a 1:1 leverage account. It is only when your stop-loss risk is more than your balance, that the leverage considerations come into play. By stop-loss risk, I mean the risk of exit rules you impose on positions whether they be broker side stop-loss or virtual/stealth stop-loss exit rules.
Yes, you are correct! I did not explain it very well there!
There is a wide accepted opinion that instead of leverage, you can consider margin - as if they are mirrors to each other. But they aren't. Margin usage percent and free margin percent depends on the max allowed leverage set in the account. FI, an account where the max leverage is 50, with 1000 USD balance, will use 50 percent of the margin when opening a 0.25 Lot position, while an account with 500 leverage allowed, will only use 5 percent of margin, with the same position size. So, margin restriction is one side of a coin, while actual leverage usage is another.
* And if we take extremes again, a 1000 USD account with 500 leverage can control risk with a 0.1 pips stop loss on a position of 2.5 Lot (which is 50 percent of free margin) on a symbol which it's average spread is 0.1 pips so the risk should be 0.2 pips which is 2 percent of the balance (risking 20 USD) - but a sudden ordinary rise in spread to 10 pips for instance, can wipe out 25 percent of account.
The numbers are rough approximation only.
That's one reason for me, though I have some others to do control leverage.
**Well, maybe not such an ordinary rise in spread from 0.1 to 10, but those things do happen.
***Also, I think a framework should have the ability to allow users to open positions based on leverage - either for a manual trader or for an ea
The best option for beginners and short-time traders would be to trade with smaller leverage with minimum positions to avoid any higher risk or losses.
And start demo next cent accounts later that will be the std account.