Quote:
Originally Posted by pan
hey dave
im having a bit of a mental block with leverage. if for example i open a standard account with $25k. that would imply that i am leveraged at 4:1. if i employ a money management risk of 2% of my total account. that would mean i am prepared to lose $500 for being wrong. if i am trading a pair of currencys where the usd is not the base currency, and therefore valued at $10 per pip, does this mean that my initial stop would be 50 pips away from my entry price?
pan
|
Hey Pan,
Good questions. There are two factors that determine how much leverage you are using. The first is how much money you have in your account ($25K in this example) and the second is how large of a position you trade. So if you trade 1 standard contract of 100K then yes you would be leveraged at right around 4 to 1 (I say right around because on currency pairs where the USD is not the base currency it may be a little more it may be a little less as I outline in the lesson). If you trade two contracts then 8 to 1 etc.
If you open an account with $25K and are prepared to risk 2% then yes this is $500 that you are wiling to risk. You are also correct that if you are trading a currency pair where the USD is the second currency in the pair then you are risking $10 per pip, per contract traded.
So with this in mind yes if you were trading 1 contact and only wanted to risk $500 then you would put your stop 50 pips away. If you were trading two contracts then you would put it 25 pips away etc.
Hope that helps. Let me know if there are any other questions.
Best Regards,
Dave