My Money management, and drunk monkeys.

Even though I have been trading live a while now, I still don't fully feel like I get some aspects of leverage and money management. That why this is in the n00b section.

Assume...
I have a $50000 account.
I want to set a hard stop at 2%. I never will lose more than this in any given trade. Usually my stops are a bit away, within 20-40. Usually, depending upon the trade, I aim at a 2%-4% profit.

So on any one trade, I am willing to lose 2%. That's $1000. If I am only willing to lose that much at $25 per pip, so thats a 40 pip stop loss, If $50 it's 20. My comfort level is somewhere in there.

Assuming a guy stuck to these (or similar) rules Why would it matter whether my leverage was 1:5 or 1:400?? I KNOW I'm not using all that leverage, but how could leverage "break my bank" quicker if all I am ever willing to lose is 2%, regardless of leverage or stop loss??

The only way I can see it hurting me is if I got greedy or careless. Or if I constantly was at $100 a pip, Or $200, just because I could afford it.


I think, from reading, that there are two uses of the word: Leverage, and this may be my confusion. I think they are:

1) What my broker will allow me to use per dollar, like 1:100.
2) How much of my actual balance is margined at any one time.

I have read attempts to describe these differences, but have failed. While educating me, please assume I am a retarded monkey.

Who is Drunk.
And asleep.

Thank you!!

Really the method is quite simple to protect yourself to the limit of 2% per trade.

Lots = AccountBalance (or equity if you wish to be more conservitive)*0.02/ StopPips/ Pipvalue.

Example:
$50,000 * 0.02 = $1000
1000 /40pips = 25
25 / $10.00 Pip value for EurUsd = 2.5
Lots = 2.5

That's all there is to it. If you follow this, you will never lose more than 2 % unless your broker ignores your stop.

i think confusion comes because people use margin and leverage interchangebly.


Margin in forex is the required collateral you need to have in order to open positions.

Leverage is just having to control bigger sums of money for smaller deposit.

The way they work together is that your leverage determines your margin. For ex. 1:50 leverage, you need 2% of the total position in your cash balance to maintain open postions. If you don't meet that you get closed out.

So people break their accounts by choosing very high leverage AND using lots that their account cannot support.

On a mini lot (10k) the pip movement is about $1/pip but it needs $200 margin on 1:50 leverage . So people trying to trade mini lots with few hundred dollars get wiped out so easily cause forex market can fluctuate 100-200 pips or more on typical day.

I hope that clarifies it. If i'm wrong, then i'm as confused as you

Jason, you're over analyzing. I know because I'm prone to doing the same.

You've answered your own question. Two types of leverage, broker leverage (what they will allow), and true leverage (what you allow within your own MM rules).

Maybe you've already seen this thread but if not, hopefully it will shed some light on the subject.

http://www.forexfactory.com/showthread.php?t=60845

So if I had a $70,000...
x .02 = $1400

and I wanted a 20 Point stop loss that would be 70.

In that trade I could use 7 lots???

This leads one to believe that 1:400 is perfectly ok, as long as you follow the rules.
Not that you would ever need that much....

True enough, as long as you did not violate the formula. However, I think you would be hard pessed to find any broker that would give you 1:400 on 70k

Place 10K into your trading acct and 60K in the bank, At 1:400 you could still put on that 7 lot position since it is only 2% of your overall trading acct. So using a 1:400 is a means of protecting your capital.
What seems to happen though is that a a person will put all their money into a 1:400 acct and overtrade it.

An excellent point and a great idea. Then less risk of default by the broker as well.

I have already blown a couple of requisite accounts,,, but now will have between 50k and 64k within the next coupla weeks. Its a lot, and I'm not interested in, you know, blowing it all.

That is an interesting idea...

About Other currencies?

I was trading GBP/JPY today, and had to figure out the formula....after the trade was placed. Was the only thing I could do to see what that exotic was worth in a lot.....

Is there one place to see all these values?