It’s surprising to see how so many are not sure how risk is calculated and what the exposure really means in terms of P&L.
This obviously is a major block in the road on the way to gaining confidence necessary to avoid losses.
So let’s break it down –
*P&L is calculated by lot size * movement.
Example: If you have 100 ounces of Gold (1 lot) – That’s $100 in P&L (Profit/loss) for each $1 Gold moves in value, so if the price 1890 and you are buying 1 lot , price moves by $5 higher – That’s a $500 profit ($100*$) , same thing in reverse, if it would drop by $5 that’s a negative of -$500 in open P&L.
Leverage decides what you are technically able to open in terms of margin used.
So if your leverage on Gold is 1:100 – The value of a 1 lot trade is the price of Gold multiplied by the amount of ounces , so let’s say 1890*100 = $189,000 value trade, but your leverage is 1:100, so you would only need $1,890 of used margin (189,000:100) to open the trade.
But if you have 1:20 as leverage, you would need 5 times more used margin to open the trade.
So a common misconception is that your risk is your leverage.
That’s not true.
Your risk is your lot size.
But if you have very high leverage , than you can open very high lot size with a small account – Which is extremely dangerous and not advised.
So what does an experienced , smart trader do? No matter what his leverage is, he understands the short-term and the long-term range of movement, and opens a lot size that fits the size of his account considering the range of movement.
If the account size is $100,000 , and you are buying 1 lot of Gold:
The weekly range is 1840-2,000 , the short-term range is 1880-1910 – Price is 1890
So the exposure is ~$1,000 in the short-term (1%) back to the short-term support 1880 , compared to $2,000 on the short-term resistance (2%) of 1910.
The long-term exposure is to 1840, meaning a $5,000 exposure 5% ($100*$50) from 1890 – but 2,000 is the top of the weekly range, meaning – $110 up ($110*100) = $11,000 (11%).
So didn’t really matter what the leverage is 1:20 or 1:100, what matters here is the range and the lot size.
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