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MasterForex Broker - About an anguish in choosing a leverage

Discussion in 'Company Articles' started by MasterForex Broker, Jul 6, 2012.

  1. MasterForex Broker

    MasterForex Broker MasterForex.org Representative

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    Dear colleagues, today I’d like to think about such an important question as choosing a leverage. When I was newbie at the market, I thought that the higher the leverage, the more I earn. That was a big mistake and now when I see leverage 1:1000 I understand that you hardly win with it.


    What does the choice of leverage depend on? Firstly, you should determine what kind of trader you are. If you prefer positioning trading, middle and long termed positions, big leverage will only hinder you, but in this case you need significant deposit. For example, to keep 1 lot position at 1:100 leverage you need not less than 1000$. If you prefer dashing news trading or other extreme kinds of trading, you may need quite big leverage. However in this case you should remember that the speed of income is equal to the speed of losses. If the trend goes in the opposite position, you can quickly lose the entire deposit.

    After the definition of trading style, you can think of other parameters which influence the choice of the leverage. For example, the ratio of the deposit, the amount of open positions, maximum drawdown that a trader can afford based on his deposit

    1. Divide your deposit into 3 parts. Two of them can be invested into any instruments, which have low correlation level. Ideally, instruments should have zero correlation, however it happens rarely. The third part is insurance.

    2. From the one-third dedicated to trading, part should be spent to the market deals, part should be saved for insurance in case of loss. This volume of the deposit will be your maximum allowable volume of loss. As a rule, the volume of loss shouldn’t exceed 10% of investments, ie 10% of 30%.

    3. Next is to assess the likely amount of drawdown in pips for each specific instrument. In EURUSD case it’s about 25-30 pips. As a result, you’ll get the volume of pips which you need to sit out the drawdown. Basing on this you should choose the leverage. In this case, the amount of drawdown in pips shall be multiplied by the leverage to get the volume of drawdown in monetary terms, the value obtained must be less than the means that a trader willing to lose on each of the open positions, ie for each one-third should fall by 10% reserve.

    4. After everything mentioned above, you’d better correct the result according with the trading style. In this case you should take a decision on the base of you expert experience.

    The choice of the leverage of big players is usually limited by 1:100 and 1:50. Also there is an often leverage 1:33. The maximum leverage ever at the market of stock papers is 1:20. This leverage is available only for professional traders on New York stock. To get a status of professional trader it’s necessary to pass the exams and regularly confirm the status. In other cases at stock market leverage is limited by 1:3. Make your own conclusions about the volume of the deposit, leverage and maximum available volume of the position. Such information will be useful not only during preparations to the trading, but during the trading itself. In particular, the calculation of correlations will allow to invest in little dependent from each other markets, the average volume of drawdown will properly set stop-losses. The most important aspect of such preparation is self discipline. Without this knowledge it’s very-very hard to stay in the market in profit. Trade with the trend, good profits to you!

    Author Karen Galegov
    Article link http://blog.masterforex.org/?p=741&lang=en#more-741
     

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