Trigger Explanation
The trigger point for overleveraging is determined by the relative risk to the account’s daily drawdown limit. If the accumulated risk exceeds a certain percentage of the initial daily drawdown, it indicates a violation of prudent risk management practices.
Forex and Major Currency Pairs: A violation occurs if the total open position generates a profit or loss greater than 25% of the initial daily drawdown within a 10-pip movement.
Cryptocurrencies: A violation occurs if, for every $500 movement in price, the total asset position generates a profit or loss greater than 20% of the initial daily drawdown.
Indices: A violation occurs if, for every $10 movement in price, the total asset position generates a profit or loss greater than 12.5% of the initial daily drawdown.
Metals and Commodities: A violation occurs if, for every 10 pip movement in price, the total asset position generates a profit or loss greater than 12.5% of the initial daily drawdown.
Simple Formula for Checking Threshold
Position Size × Price Movement × Pip Value ≤ Threshold Percentage × Initial Daily Drawdown
Explanation of the Formula
Position Size: The total number of contracts or lots in the trader’s position.
Price Movement: The threshold movement in price for the specific asset class being traded.
Pip Value: The value of one pip for the specific asset.
Threshold Percentage: The threshold percentage for the specific asset class being traded.
Daily Drawdown: The initial allowable daily drawdown for the trader’s account.
If the calculated value on the left side of the equation exceeds the threshold determined by the threshold percentage, it indicates a violation of prudent risk management practices.
Implications and Consequences
Overleveraging poses significant risks to traders’ capital and the stability of the trading environment. Excessive leverage can lead to rapid and substantial losses, potentially wiping out a trader’s account. At TopTier Trader, overleveraging is strictly prohibited, and violations of this policy may result in severe consequences, including strikes, delayed payouts, reduced/rejected payouts, and ultimately, a ban from the platform.
NB: Overleveraging would occur if your total open position on a single asset surpasses the threshold for that specific asset's asset class.
Examples of Overleveraging Policy Application
Example 1: No Violation
Asset: EUR/USD
Total Position size: 3 standard lots
Pip value for EUR/USD: $10 (for 1 standard lot)
Price movement: 10 pips (threshold for forex and major currency pairs)
Initial balance: $200,000
Initial daily drawdown limit: $10,000
Using the formula:
3 × 10 × $10 ≤ 0.25 × $10,000
$300 ≤ $2,500
Since $300 is less than 25% of the initial daily drawdown limit of $10,000 ($2,500), the total position size does not exceed the threshold. Therefore, it is not a violation of the overleveraging policy.
Example 2: Violation
Asset: XAU/USD (Gold)
Total Position size: 35 standard lots
Pip value for XAU/USD: $10 (for 1 standard lot)
Price movement: 10 pips (threshold for metals and commodities)
Initial balance: $200,000
Initial daily drawdown limit: $10,000
Using the formula:
35 × 10 × $10 ≤ 0.125 × $10,000
$3,500 ≤ $1,250
Since $3,500 is greater than 12.5% of the initial daily drawdown limit of $10,000 ($1,250), the total position size exceeds the threshold. Therefore, it is a violation of the overleveraging policy.
Example 3: No Violation
Suppose a trader is trading US30 (Dow Jones Industrial Average) with the following details:
Asset: US30 (Dow Jones Industrial Average)
Total Position size: 20 standard lots
Pip value for US30: $1 (for 1 standard lot)
Price movement: $10 (threshold for indices)
Initial balance: $200,000
Initial daily drawdown limit: $10,000
Using the formula:
Position Size × Price Movement × Pip Value ≤ 0.125 × Initial Daily Drawdown
20 × 10 × $1 ≤ 0.125 × $10,000
$200 ≤ $1,250
Since $200 is less than 12.5% of the initial daily drawdown limit of $10,000 ($1,250), the total position size does not exceed the threshold. Therefore, it is not a violation of the overleveraging policy.
Example 4: Violation
Suppose a trader is trading Bitcoin (BTC/USD) with the following details:
Asset: BTC/USD (Bitcoin)
Position size: 15 standard lots
Pip value for BTC/USD: $1 (for 1 standard lot)
Price movement: $500 (threshold for cryptocurrencies)
Initial balance: $200,000
Initial daily drawdown limit: $10,000
Using the formula:
Position Size × Price Movement × Pip Value ≤ 0.2 × Initial Daily Drawdown
15 × 500 × $1 ≤ 0.2 × $10,000
$7,500 ≤ $2,000
Since $7,500 is greater than 20% of the initial daily drawdown limit of $10,000 ($2,000), the total position size exceeds the threshold. Therefore, it is a violation of the overleveraging policy.
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