Leveraged Risk

                             Leveraged Risk

           Does a higher leveraged account always equal greater Risk?XM helps everyone better understand leveraged，there are 2 traders; Trader A and Trader B. Both Traders begin with $1000 and are stopped out when their equity level falls to 50% of their Margin. Trader A chooses an account with 1:50 leverage and Trader B one with 1:500 leverage.

If both Traders open a position for 0.25 lots (25,000) on EURUSD (where each pip will be worth $2.5) (let us assume the rate to be at 1.4200), then each trader will have the following Margins (Lot size*Price/Leverage):

Trader A:

Margin= (25,000*1.4200)/50 = $710

Trader A will be stopped out at 50% of the Margin, hence he will be stopped out if and when his equity drops from $1000 and reaches $355 ($710*50%) i.e. when he loses some 258 pips: (1,000-355)/2.5

Trader B:

Margin= (25,000*1.4200)/500 = $71

Trader B will be stopped out at 50% of the Margin, hence he will be stopped out if and when his equity drops from $1000 and reaches $35.50 ($71*50%) i.e. when he loses some 385.8 pips: (1,000-35.50)/2.5

From the above example it can be clearly seen that the Trader with the account which gives him 1:500 leverage has a greater ‘cushion’ with respect to the amount he can lose and still keep his position open. As such it is in fact less risky to have a higher leverage provided it is used in the right way, which is not to open the maximum possible position but instead to use it in order to have a lower margin and hence have a bigger gap by which you may drop before stopping out?

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