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I have a question. I'm a newbie 37 replies

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newbie question

  • Post #1
  • Quote
  • First Post: Feb 7, 2006 11:51pm Feb 7, 2006 11:51pm
Hi everyone, I am looking to start an account with 1000 dollars.
I understand that its not alot, and i should be trading micro mini lots.
I read that Oanda you can trade 1 cents for every pip and interbankfx its 10 cents for a pip.
Will i be okay with interbankfx. Lets say i risk 2% in a trade that would be $20 and that will be around 200 pips. Or should i go with Oanda
Thanks for the advice.
Quoting jotty
Hi everyone, I am looking to start an account with 1000 dollars.
I understand that its not alot, and i should be trading micro mini lots.
I read that Oanda you can trade 1 cents for every pip and interbankfx its 10 cents for a pip.
Will i be okay with interbankfx. Lets say i risk 2% in a trade that would be $20 and that will be around 200 pips. Or should i go with Oanda
Thanks for the advice.
Hi Jotty,

Try this post........http://www.forexfactory.com/forexfor...1&postcount=13

Dial
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You can trade 1 cent per pip at interbankfx too
Keeping it Simple
I would go with the higher leverage account. However it most definitly depends on the amount of trading experience you have prior to entering the fx markets. The amount of research is directly proportional to your initial and future success, so if you want to learn through experience go with a smaller leveraged account.
Thanks guys. Do i want high or low leverage.

I dont understand how the thing works.
Quoting jotty
Thanks guys. Do i want high or low leverage.

I dont understand how the thing works.
Hi jotty.. Is it okay if I ask you how long you have been trading?
I think it is beneficial so that we may know what advice to give you..
(Or you to give me.. )

But anyway, I think the link posted by diallist above will give you an idea what leverage means.. But basically, leverage is calculated by the amount you are trading in respect to the size of your account.
I'll repost the link given by Diallist to help you understand it more:
http://www.forexfactory.com/forexfor...1&postcount=13

But as regards to your question, I think it's safe to say that you should start with low leverage. Using low leverage will help you gain more experience by not blowing up your account.
i traded for 3 months

blew up 1 live account so far
haha, gonna get a stable part time job, sign up for the james16 course
demo for abit, then go live again or maybe demo with a micro lot account
Quoting jotty
Thanks guys. Do i want high or low leverage.

I dont understand how the thing works.
Hi jotty,

You asked "Do I want high or low leverage". The answer to that question is "yes".

There are two types of leverage: Broker Leverage and True Leverage.

Broker Leverage: Anywhere from 50:1 up to 400:1. The only practical value in broker leverage is to reduce your margin requirements. So, for that purpose, and that purpose only you should take the highest leverage your broker offers.

True Leverage: This is calculated as Position Size divided by Account size. As a general rule of thumb this leverage should match the traders experience level as follows:

Beginner 1:1 or less.
Novice 1:1 up to 3:1
Intermediate 3:1 up to 5:1
Advanced 5:1 up to 10:1

So you want high broker leverage for margin and low true leverage for trading.

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
Quoting diallist
Hi jotty,

You asked "Do I want high or low leverage". The answer to that question is "yes".

There are two types of leverage: Broker Leverage and True Leverage.

Broker Leverage: Anywhere from 50:1 up to 400:1. The only practical value in broker leverage is to reduce your margin requirements. So, for that purpose, and that purpose only you should take the highest leverage your broker offers.

True Leverage: This is calculated as Position Size divided by Account size. As a general rule of thumb this leverage should match the traders experience level as follows:

Beginner 1:1 or less.
Novice 1:1 up to 3:1
Intermediate 3:1 up to 5:1
Advanced 5:1 up to 10:1

So you want high broker leverage for margin and low true leverage for trading.

Dial
Oh yeah.. I forgot that there were two kinds of leverages..
Thanks for the refresher Dial..
Guess I'm gonna get spanked by Daddy Fiji for forgetting..
Quoting eastmaels
Oh yeah.. I forgot that there were two kinds of leverages..
Thanks for the refresher Dial..
Guess I'm gonna get spanked by Daddy Fiji for forgetting..
Speaking of spanking, Michele was asking about you the other day.

Dial

P.S. The term "True Leverage" was coined by Fiji. Credit where credit is due.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
Quoting diallist
Speaking of spanking, Michele was asking about you the other day.

Dial

P.S. The term "True Leverage" was coined by Fiji. Credit where credit is due.
Oh no... not her...
Any recommendation for a hard piece of wood to put on my behind?

By the way for anyone reading, don't mind the spankings around here FF..
These are just the way people here say "we care."
Quoting jotty
i traded for 3 months
blew up 1 live account so far
Hi Jotty!
What have you learned blowing up this first account?
I ask you this because it's important, it's your first experience.

ummm....sorry but can someone go over the two types of leverages again. wats "true leverage"? can u give an example of this, just wen i think i got most points figured out, i read up on something new! must take it slowly......
HI Dial,

ummm, bit not sure. Do you mean 1:1 will take care of both broker&true leverage....! Bcoz in one of earlier post you pointed to take the highest leverage offered by broker to reduce the margin (something like 400:1), other side as a newbie u say 1:1 is good to trade......not though clear ......

Fxbee

Quoting diallist
Hi jotty,

You asked "Do I want high or low leverage". The answer to that question is "yes".

There are two types of leverage: Broker Leverage and True Leverage.

Broker Leverage: Anywhere from 50:1 up to 400:1. The only practical value in broker leverage is to reduce your margin requirements. So, for that purpose, and that purpose only you should take the highest leverage your broker offers.

True Leverage: This is calculated as Position Size divided by Account size. As a general rule of thumb this leverage should match the traders experience level as follows:

Beginner 1:1 or less.
Novice 1:1 up to 3:1
Intermediate 3:1 up to 5:1
Advanced 5:1 up to 10:1

So you want high broker leverage for margin and low true leverage for trading.

Dial
Quoting Croesus
Hi Jotty!
What have you learned blowing up this first account?
I ask you this because it's important, it's your first experience.

haha, stick with the system no matter what. do no over leverage
no scalping. trading on the larger time frames are some of the things i found that helps. and prices sometimes move against you before moving in your direction. lol
sadly when i realized all that, my account is down to the last 10%, lol.
Quoting jotty
haha, stick with the system no matter what. do no over leverage
no scalping. trading on the larger time frames are some of the things i found that helps. and prices sometimes move against you before moving in your direction. lol
sadly when i realized all that, my account is down to the last 10%, lol.
ok correct answer

Good luck Jotty
  • Post #17
  • Quote
  • Edited 8:56pm Feb 8, 2006 8:33pm | Edited 8:56pm
Quoting spinklet`
ummm....sorry but can someone go over the two types of leverages again. wats "true leverage"? can u give an example of this, just wen i think i got most points figured out, i read up on something new! must take it slowly......
I'm going to try to take on this and hopefully anyone will correct me if I'm wrong..
Just so you know, I learned also here in Forex Factory (FF), and I'm just trying to help the best way I could.

So anyway, broker leverage, the way I understand it, determines the maximum position/contracts you can have (though in reality, you can never really use such leverage because of spread, but for now, let's just focus on you understanding the two types of leverage).

As for true leverage, it is the position you currently have, in respect to your current equity. The computation Diallist gave above should help you understand it more clearly.

These things may sound a bit confusing at first, but don't worry, you'll get it in time (as if I already got it.. ).. Just continue studying..

So for example, for a 200:1 broker leverage:

Capital: $1000
Broker Leverage: 200:1
Lot size: 10,000 (for a mini-account)

Leverage when you take on one contract:
10,000(lot)/1000(capital) = 10:1 leverage

Max. leverage:
200,000/1000 = 200:1 leverage

So to max out your broker leverage, you will have to trade 20 contracts. Although you will not be able to really take on that position because of spread, for discussion purposes, let's assume that you were able to take on that position.

So in the case above, the moment you took the position of 20 contracts, you're already exercising the maximum leverage that your broker allows you (200:1), and your true leverage is also 200:1 (which is not good when you're beginning).

True leverage is the leverage you can actually control.
Broker leverage is the leverage determined by?... correct, your broker.

Now to address your questions:
1) "Why do I want to have high broker leverage?"
- in order to address this question, I think it's important for you to understand margin. And right now, I still don't have that good a grasp on such topic to avoid adding confusion. So for now, I think it's important to have a good grasp on leverage first.

2) "Why do I want to have low true leverage?"
- So that you will not be putting on too large a position specially when you're just beginning. But if you've figured it out, having a big "true leverage", will increase the amount you can profit or lose on any single trade.
If you want to maximize the learning (if you're already trading live), then what you need to focus is on how to protect your account, rather than on how to profit more.

I hope this helps, but if it causes you more confusion than understanding, then please disregard this post and wait for other people's opinion.

East
P.S.
Okay, I peeked again at Fiji's MM...
Quoting diallist

True Leverage: This is calculated as Position Size divided by Account size. As a general rule of thumb this leverage should match the traders experience level as follows:

Beginner 1:1 or less.
Novice 1:1 up to 3:1
Intermediate 3:1 up to 5:1
Advanced 5:1 up to 10:1

So you want high broker leverage for margin and low true leverage for trading.

Dial

Just checking to see if I have my mind wrapped around this properly.

If one is a beginner trading mini lots with a $10,000 account balance, one would trade 1 lot at a time (10,000/10,000).

Also, one would risk no more than 2%-3% per trade and so with a 1 mini-lot trade, one's stop-loss would be no more than 200-300 pips away from the entry.

Correct so far?

A couple of more questions:

1) If one's system has closer stops, say 50 pips away, what would be the harm in trading 4 mini-lots at a time? That's a true leverage of 4:1, but an equal risk of 2% of the bankroll. What's the difference?

2) I have read guidelines that suggest that you never have more than 10% (or another number in that ballpark) of your bankroll at risk at a single time across all open positions. How do those rules relate to this idea of position size, true leverage and risk?


Thanks,

Jonathan
Quote
Just checking to see if I have my mind wrapped around this properly.

If one is a beginner trading mini lots with a $10,000 account balance, one would trade 1 lot at a time (10,000/10,000).

Also, one would risk no more than 2%-3% per trade and so with a 1 mini-lot trade, one's stop-loss would be no more than 200-300 pips away from the entry.

Correct so far?

A couple of more questions:

1) If one's system has closer stops, say 50 pips away, what would be the harm in trading 4 mini-lots at a time? That's a true leverage of 4:1, but an equal risk of 2% of the bankroll. What's the difference?

The leverage guidelines I gave above are based on the premise that beginners will have more losses that winners as they learn to trade. Therefore the reason for the lower leverage is to diminish the rate at which their equity is depleted, allowing them to stay in the game longer. As a trader progresses from beginner to advanced, their win/loss ratio will swing positive and they will be able to take on more leverage.

Leverage is just one piece of the pie. As you have said, percent risk, stop size and resultant position size are also in the pie. The correct sequence in preparing for a trade is:

1. Determine Stop size
2. Apply % risked to determine position size
3. Calculate resultant leverage from position size / account size.
4. Reduce % risk until leverage falls within guidelines (beginner to advanced)

Stop size, percent risk, position size and leverage are mathematically interrelated. Change one and you change the others.

As you have already figured out, having a smaller stop size allows you to put on a higher leverage and the 4:1 level is perfectly fine as long as it fits your experience level.

One thing to be cautious about is avoiding the temptation to use tiny stop sizes just so you can use higher leverage. If the stop size is smaller than what is prudent for your trading method, you will get stopped out too often. Combining that with the increased leverage that the smaller stop gave is detrimental to your equity.

Appropriate stop sizes and leverage, coupled with compounding over time is the key to riches. Not high leverage by itself.


Quote
2) I have read guidelines that suggest that you never have more than 10% (or another number in that ballpark) of your bankroll at risk at a single time across all open positions. How do those rules relate to this idea of position size, true leverage and risk?
The risk and leverage for each position should be calculated independantly, adjusting leverage by means of adjusting percent risked until it falls in line with one's experience level. Once you have the resultant percent risk for each position, just add them all together. You can keep adding positions (assuming they are not correlated) until you reach the 10% maximum.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
Quoting diallist
The risk and leverage for each position should be calculated independantly, adjusting leverage by means of adjusting percent risked until it falls in line with one's experience level. Once you have the resultant percent risk for each position, just add them all together. You can keep adding positions (assuming they are not correlated) until you reach the 10% maximum.


Thanks for the reply. That last line caught my eye, however. Opening the same position on EUR/USD and USD/CHF would most often have the effect of having two open positions on either pair. But for pairs that typically have a lesser degree of coorelation, how do you take that into account? I've never read any guidelines along those lines. Truth be told, in terms of MM, this is the first time it ever entered my mind (which is kind of scary).

Jonathan
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