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Chapter 34, Part I. A Bit More About Leverage.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Apr 22, 2012.

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  1. Administrator

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    Part I. A Bit More About Leverage.
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    Commander in Pips: Today I would like to start talking about Leverage. Although previously we’ve said that leverage increases sensitivity to price action both during wins and during losses, still I want to discuss it with more detail.


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    Do you ever think about leverage? Take a couple of moments to consider – for example, why professional traders never apply greater leverage than 1:40, but most commonly less that 1:20-1:10? Second, why do most futures contracts trade with 1:10-1:20 leverage, provided by the exchange? For instance, Gold margin is around 9000USD per contract, contract is 100 Oz or 1600USD/Oz*100 = 160,000 USD – the value of single contract. 160/9~1:17 leverage. The same is for currencies. Crude oil – 100 USD/barrel, contract is 1000 barrels and margin around 5000-6000 USD, so again - 1:20 leverage. And the last one, why do solid financial institutions, provided access to financial markets, not feel hurt from so-called “low leverage”? Why they do not feel discomfort and lack of competitiveness when they offer just 1:40 leverage or even less, while retail forex brokers could offer as much as 1:500 but still remain retail brokers.

    Pipruit: Well, I have only single idea about it. First, large market-makers and brokers have large barriers to get access to their services. Hence, most of their clients are professionals, rather than individuals. Since most professionals agree with low leverage and do not turn to retail rivals with huge leverage, I could say only, that probably they do not need it.
    Commander in Pips: Ok, let’s assume it. And why then do retail brokers offer 1:500 leverage?
    Pipruit: Probably, because the public needs it – individuals demand it, that’s why retail brokers provide…​

    Commander in Pips: Hm, curious – now try to combine both statements – the one for professionals with the one for the public. Do you see any contradiction here?

    Pipruit: Individuals demand from brokers things that professionals are trying to avoid – particularly leverage grater than 1:10-1:20.
    Commander in Pips: Well, as a conclusion I can say only – either professionals are stupid or you can’t have it both ways.

     
    #1 Administrator, Apr 22, 2012
    Lasted edited by : Oct 9, 2016
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