Leverage & Margin

J

jd_harris

I've never used Margin or Leverage Trading. I don't really like to trade outside my means and don't like the idea of blowing up my account.

Having said that, I"m currently a retail swing trader making a move into proprietary trading and trying to wrap my head around how these companies work this aspect....

Question:

For shits'n giggles, lets say I put $10K into a 10-1 leverage account at company X. I know have a working capital of $100k.

If my risk management style is 1% and the trade goes against me, do I loose $1K from my $10k or do I loose $100 from my $10K?
 
You lose of course 1K of you own money plus any interest on the loan of the remaining 90K.

Stock brokers apply an interest on the margin. Futures and forex is really leverage, not margin. They give it to you to make their odds of winning better and increase participation and they do not charge you any interest - well they charge you spread and pips. Margin and leverage are related of course. See this paper for more details: http://to.ly/7amy
 
Quote from jd_harris:

Question:

For shits'n giggles, lets say I put $10K into a 10-1 leverage account at company X. I know have a working capital of $100k.

If my risk management style is 1% and the trade goes against me, do I loose $1K from my $10k or do I loose $100 from my $10K?
More...


That's the problem with any type of leverage. It magnifies potential gains or losses. In your example, losing $1K of your $10K is a huge % loss. Taking a 'risk' that big is not good money management. Depending on win-loss ratios, maybe 3-4% of your $10K might be ok to lose. If you trade a lot & hold overnight, then you're going to blow out risking 10%.

Also, good prop firms often limit leverage to 6-1 for overnights.
 
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