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Author Topic: how does leverage amplify profit and or losses  (Read 3603 times)
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Karma: 1
Posts: 16

« on: Tuesday, March 13, 2012 - 14:52 »

I have been experimenting with leverage on a demo account. Using your 2 percent rule max on any given trade with the same account balance but using different leverage I have come to this conclusion. Increasing the leverage only decreases the amount you risk on any given trade but the amounts of lots bought and the profits and or loss stay the same. So than how does higher leveraefge even have any meaning on an account that only risks 2 percent on a given trade. All it does is decrease the amount needed to hold the same position and increases the free margin. It does not increase profits any. It seems using the 2 percent rule you never really need to bother with leverage as it has hardly any effect. Any clarification on this topic would be appreciated. Did I reach the right conclusion.
Black Knight
Diamond Contributor

Karma: 45
Posts: 1,338

Mitakuye Oyasin

« Reply #1 on: Wednesday, March 14, 2012 - 19:42 »

Simply put, you get to trade more lots with lower deposit amounts - you make your money work harder for you (but also bad trades work against you).  For a more detailed explanation, check out http://www.fxstreet.com/education/forex-basics/10-basisc-forex-lessons/2010/05/17/
Silver Contributor

Karma: 21
Posts: 55

« Reply #2 on: Wednesday, March 14, 2012 - 23:29 »

The leverage ratio that you can set with your broker is a leverage limit. All it means is that, for example, if you have a $100k account and the leverage is set to 20:1, you can't trade with more than 20 lots in total.

If you're using the 2%/6% money management system, you'll probably never need more than 30:1 anyway. The only way would be if you trade with extremely tight stops.

Try a few different settings on demo to see what happens. If you find that the maximum you would realistically use is 20:1, maybe set your leverage to 25:1 as a safeguard against typing mistakes. Eg. if you type an extra 0 by mistake and your leverage is set to 200:1, the broker will open the position for you. If it's set to 25:1, you'll probably get an error message instead.
Waylay Dave
Gold Contributor

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Posts: 190

« Reply #3 on: Tuesday, November 14, 2017 - 07:40 »

Leverage are considered as a twin edged sword. If you want to survive you need to learn about using it in a proper way.
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