Information For Beginners

As you read this thread, pay particularly close attention to the money management posts 18 thru 33.

Psychology articles from IncredibleCharts

Searching for the Holy Grail

Trading Psychology

Trading with Emotions

Investor's Logic

Gamblers' Logic

Trading as a Business

Click the link below to read an excellent article on trading as a business. It is very long, but packed with great information, and well worth the read.

Trading as a Business - by Charlie Wright

Introduction to Forex

Here you will find links and attachments to introductory articles on the Foreign Exchange market.

Suggestions for content are welcome.

Federal Reserve Foreign Exchange Webpage

Forex Manual in English - Scroll down and click FREE, then scroll down again and wait for the download link.
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Recommended Reading - Books & Articles

Articles on FXStreet - Recommended by Isotonic

http://www.fxsol.com/images/getting_...x_glossary.gif
(From FX Solutions)


Standard Forex Terms

Base currency: The base currency is the first currency in a currency pair, and the currency that remains constant when determining a currency pair's price. The United States Dollar (USD) and the European Union Euro(EUR) are the dominant base currencies in terms of daily traded volume in the foreign exchange market. The British Pound (GBP), also called sterling or cable, is the third ranking base currency. The USD based pairs are USD/JPY, USD/CHF and USD/CAD; the Euro based pairs are EUR/USD, EUR/JPY, EUR/GBP, and EUR/CHF. The GBP is the base for GBP/USD and GBP/JPY. The Australian Dollar (AUD) is its own base against the USD (AUD/USD).

Basis: The difference between the spot price and the futures price.

Basis point: One hundredth of a percentage point.

Bid /Ask Spread: The difference between the bid and offer (ask) prices; also known as a two-way price.

Cable: Trader term for the British Pound Sterling referring to the Sterling/US Dollar exchange rate. Term began due to the fact that the rate was originally transmitted via a transatlantic cable starting in the mid 1800's.

Central bank: The principal monetary authority of a nation, controlled by the national government. It is responsible for issuing currency, setting monetary policy, interest rates, exchange rate policy and the regulation and supervision of the private banking sector. The Federal Reserve is the central bank of the United States. Others include the European Central Bank, Bank of England, and the Bank of Japan.

Conversion: The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Cross rates: An exchange rate between two currencies. The cross rate is said to be non-standard in the country where the currency pair is quoted. For example, in the US , a GBP/CHF quote would be considered a cross rate, whereas in the UK or Switzerland it would be one of the primary currency pairs traded.

Currency: A country's unit of exchange issued by their government or central bank whose value is the basis for trade.

Currency (exchange rate) risk: The risk of incurring losses resulting from an adverse change in exchange rates.

Devaluation: Lowering of the value of a country's currency relative to the currencies of other nations. When a nation devalues its currency, the goods it imports become more expensive, while its exports become less expensive abroad and thus more competitive.

Drawdown: The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough. For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.

End of day (mark to market): Mark-to-market values a trader's open position at the end of each working day using the closing market rates or revaluation rates. Generally the revaluation rates are market rates at 5pm EST time. Any profit or loss is booked and the trader will start the next day with the position valued at the prior day's closing rate.

Euro: The currency of the European Monetary Union (EMU), which replaced the European Currency Unit (ECU). The countries currently participating in the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Greece, Italy, and Spain.

Exchange rate: The price of one currency stated in terms of another currency. Example: $1 Canadian Dollar (CDN) = $0.7700 US Dollar (USD)

Fixed exchange rate: A country's decision to tie the value of its currency to another country's currency, gold (or another commodity) , or a basket of currencies . In practice, even fixed exchange rates fluctuate between definite upper and lower bands, leading to intervention.

Foreign exchange (Forex): The simultaneous buying of one currency and selling of another in an over-the-counter market.

G-7: The seven leading industrial countries, being the United States, Germany, Japan, France, Britain, Canada, and Italy.

G-10: G7 plus Belgium , Netherlands and Sweden , a group associated with the IMF discussions. Switzerland is sometimes involved.

G-20: A group composed of the Finance Ministers and central bankers of the following 20 countries: Argentina , Australia , Brazil , Canada , China , France , Germany , India , Indonesia , Italy , Japan , Mexico , Russia , Saudi Arabia , South Africa , South Korea , Turkey , the United Kingdom , the United States and the European Union. The IMF and the World Bank also participate. The G-20 was set up to respond to the financial turmoil of 1997-99 through the development of policies that “promote international financial stability”.

Hedge fund: A private, unregulated investment fund for wealthy investors (minimum investments typically begin at US$1 million) specializing in high risk, short-term speculation on bonds, currencies, stock options and derivatives.

Hedging: A strategy designed to reduce investment risk. Its purpose is to reduce the volatility of a portfolio by investing in alternative instruments that offset the risk in the primary portfolio.

London Inter-Bank Offer Rate or LIBOR: The standard for the interest rate that banks charge each other for loans (usually in Eurodollars ). This rate is applicable to the short-term international interbank deposit market, and applies to very large loans borrowed from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

Leverage: The degree to which an investor or business is utilizing borrowed money. The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded is $100,000 dollars and the required margin is $2000, the trader can trade with 50 times leverage ($100,000/$2000). For investors, leverage means buying on margin to enhance return on value without increasing investment. Leveraged investing can be extremely risky because you can lose not only your money, but the money you borrowed as well.

Liquidity: The ability of a market to accept large transactions. A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.

Long: A position purchasing a particular currency against another currency, anticipating that the value of the purchased currency will appreciate against the second currency.

Margin: Funds that customers must deposit as collateral to cover any potential losses from adverse movements in prices.

Margin Call: A requirement for additional funds or other collateral, from a broker or dealer, to increase margin to a necessary level to guarantee performance on a position that has moved against the customer.

Market Maker: A dealer that supplies prices, and is prepared to buy and sell at those bid and ask prices. All CFTC registered FCMs are market makers.

Pip (tick): The term used in currency markets to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).

Position: A view expressed by a trader through the buying or selling of currencies, and can also refer to the amount of currency either owned or owed by an investor.

Premium (cost of carry): The cost or benefit associated with carrying an open position from one day to the next calculated by using the differential in short-term interest rates between the two currencies in the currency pair.

Revaluation: An increase in the foreign exchange value of a currency that is pegged to other currencies or gold.

Revaluation rates: The rate for any period or currency, which is used to revalue a position or book. The revaluation rates are the market rates used when a trader runs an end-of-day to establish profit and loss for the day.

Rollover: The settlement of a deal is rolled forward to another value date with the cost of this process based on the interest rate differential of the two currencies. An overnight swap, specifically the next business day against the following business day.

Short: To sell a currency without actually owning it, and to hold a short position with expectations that the price will decrease so that it can be bought back at a later time at a profit.

Spread: The difference between the bid and offer (ask) prices of a currency; used to measure market liquidity. Narrower spreads usually signify high liquidity.

Spot Price: Current market price. Settlement of spot transactions normally occurs within two business days.

Swaps: A foreign exchange swap is a trade that combines both a spot and a forward transaction into one deal, or two forward trades with different maturity dates.

Uptick: A new price quote that is higher than the preceding quote for the same currency.



Types of Foreign Exchange Orders

Entry Orders: An order, stop or limit, initiating an open position and executed when a specific price level is reached and/or broken. The execution is handled by the dealing desk and the order is in effect until cancelled by the client.

Entry Limit Orders: An order initiating an open position to sell as the market rises, or buy as the market falls. The client believes the market will reverse direction at the level of the order.

Entry Stop Orders: An order initiating an open position to sell as the market falls, or buy as the market rises. The client placing the order believes that prices will continue to move in the same direction as the previous momentum after hitting the order level.

Limit Orders: A limit order is an order tied to a specific position for the purpose of locking in the gains from that position. A limit entry order placed on a buy position is an order to sell. A limit order placed on a sell position is an order to buy. A limit order remains in effect until the position is liquidated or cancelled by the client.

Market Order: An order to buy or sell which is to be filled immediately at the prevailing currency price.

OCO (One Cancels the Other): A stop-loss order and a limit order linked to a specific position. One order, the stop, is to prevent additional loss on the position, and one order, the limit is to take profit on the position. When either order is executed, closing the position, the other is automatically cancelled.

Stop-Loss Orders: An order linked to a specific position to close that position and prevent additional losses. A stop-loss order placed on a buy position is an order to sell that position. A stop-loss order on a sell position is an order to buy that position. A stop-loss order remains in effect until the position is liquidated or cancelled by the client.

Question:

I'm new to forex, and I would like some guidelines on where to start in regards to books, where to open an account, etc, etc.
Answer:

For a broker, choose one who offers 1K lots ($1,000). They are sometimes referred to as micro lots. (A mini lot = $10,000 and a standard lot = $100,000).

There are some deep technical reasons for wanting a micro lot account which you'll learn about later. Just take it on faith for now that that is what you want. I recommend FX Solutions www.fxsol.com, who is my broker, or you might choose Oanda who is very popular and lets you trade position sizes even smaller than a micro lot.

For your first three books, I'd recommend, "Trading in the Zone" by Mark Douglas for psychology, "Trade Your Way to Financial Freedom" by Van Tharp for money management, and "High Probability Trading" by Marcel Link for trading methodologies. These three books will get you started on the three parts of trading you must have to be successful, namely

MIND (psychology and discipline)
MONEY (money management)
METHOD (the mechanics of trading)

Think of these three M's as the legs on a three legged stool. If you are missing any one of the three, the stool will fall over, and you will fail.

Open a demo account with your broker of choice. Do not open a live account with money yet. Choose one of the systems listed in the Trading Systems thread of this, the Beginners Forum. Trade that system on demo until you are consistently profitable. Trade the demo exactly like you will trade live. The habits you develop in the demo will subconciously carry over into your live trading. So don't be sloppy with your demo or you be sloppy with live and you'll lose all your money.

Dial

Beginners Forum Intro

Welcome to Forex Factory's Beginners Forum!

The Beginners Forum started on December 7th, 2005. At the moment, content is sparse. I invite suggestions for content that would be useful to and suitable for beginning forex traders. Please post your recommended links, or attach your files (freely shareable only please) in the Beginners Forum.

Thank you and enjoy your visit!

Diallist

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National Futures Association guide to trading forex.


NOTE: After you unzip the file below you will need to rename it from "retail" to "retail.pdf" for it to work.

This one is from Sure-fire forex by Mark McRae. As with all these commercial guides you have to skip the plugs to get to the content.

Contributed by Isotonic

Here's another forex intro courtesy of Isotonic.

When to trade.
Contributed by Isotonic

Contributed by Isotonic.

I read these from last year. These two are freely available. More can be found from his website at www.robbooker.com - just fill in a form and he'll send you the link.

Contributed by Isotonic

See attachments.

For an online search, see: http://www.forexglossary.com/

The following article was submitted by MrWhipple.


"The Search for the Holy Grail" by Chris Tate

When traders talk about trading system design and its pitfalls they often talk about the search for the Holy Grail. They talk about the obsession of finding one specific indicator that will guarantee them continual success in the markets. Some software packages even come with indicators that are known as the Holy Grail and this only adds to the mythology of an ultimate indicator. Unfortunately whilst all traders talk of their search for the Grail few actually understand the legend behind this search and even fewer understand its relevancy to trading. And most importantly how understanding the legend can improve trading performance.

Most are familiar with the Christian myth surrounding the Grail and the search for it by knights of the round table. This myth itself first appears in written form in a 12th century French fable entitled Conte del Graal (Story of the Grail), this tale is also known as Perceval and is believed to have been written in about 1180. The myth itself revolves around a vessel from which Christ is supposed to have drunk at his last supper and which was also used to catch some of his blood during his crucifixion. The Grail was then carried to Britain by Joseph of Arimathea, where it lay hidden for centuries. The search for the Grail became the principal quest of the knights of the round table. It was thought that the Grail was guarded by a custodian known as the Fisher King. King Arthur believed that the finding the Grail would cure Camelot of its ills and restore its glory.

Given its supposed history it is easy to understand the importance of the Grail to Christian mythology but the question remains as to why this is important to traders is less obvious. Most traders look merely at the external features of the legend, the fact that it was a fruitless search, the grail was never found. Traders associate this with their quest for the perfect indicator yet this is only half the legend. Being a parable the legend of the grail requires a bit of interpretation. King Arthur send his knights on the quest to enable Camelot to recover. At the time of the quest Camelot was racked by both internal dissent and an external threat. Arthur thought finding the grail would fix these problems. The meaning of the parable is clear it is about the individual not the situation. It is about individuals looking for an external solution to what is an internal problem.

Such a situation manifests itself in traders. How often has the lament been heard, if only I had a better system, or if only I had different data, or maybe if I tried Fibonacci numbers for my moving averages. Many traders have even believed that if they change the colour of their indicators that this will somehow improve their trading. As if altering these external variables will alter their trading performance.

It is undoubtedly true that we need entry signals or setups to enter the market but their importance in trading is vastly overrated. Tomes have been written about signal generation, indicators move in and out of vogue, the current trendy indicator appears to be the moving average ribbon. Charts of price action are now being buried beneath layer upon layer of coloured lines. It is as if by obscuring raw price action traders somehow hope to divine its intent.
Yet Charles LeBeau author of The Technical Traders Guide to Computer Analysis of Futures Markets claims to have tested every possible combination of moving average conceivable and found their performance to be little better than random probability. In any serious testing trend following indicators struggle to have a reliability of above 50%. The MACD histogram, which is thought to be among the best of all indicators, often has a reliability of below 50%. I have personally run a test trading the SPI on an intraday basis by tossing a coin in the morning and found it to be profitable. It is extremely difficult for traders to accept that the tools they use may not be as effective as they thought, or that their methodology may have a reliability below that of simply tossing a coin.

If your trading breaks down then it is more than likely due to some psychological block not your indicators and finding new indicators will not improve your trading. What will improve your trading is an understanding that trading is far more than a search for the ultimate indicator. What has been demonstrated from interviews with top traders is that methodology or the means by which they engage the market is largely irrelevant. What is important is their underlying psychology and how they apply this to the market, it is not what number they use for their moving averages.

Top traders have numerous features in common, they are organized, disciplined, self reliant, analytical. All of these are characteristics of individuals who excel in any endevour but there is one characteristic that truly sets them apart. They are all grown ups, this may seem like a somewhat facetious remark but top traders realize that ultimately their success or more importantly failure comes down to them as individuals. Traders who look for the Grail are looking for an external crutch to lean on and to blame when things go wrong, these are the same sort of people who blame their broker when a trade goes wrong. If you have chosen to take someone else's advice or you believe that indicators are all there is to trading then that is your problem no one else's. No magic indicator will save you from yourself and your own folly.What will save you is an understanding that internal problems such as a lack of discipline or an inability to accept personal responsibility for your trading cannot be solved by some external solution such as downloading hundreds of indicators for either your Supercharts or Metastock packages."

Originally posted by Diallist in another thread.

You got the $2000 correctly. Now, to find out what position size to trade (how many units to trade) you have to know the value of each pip, and the size of your stop.

Let's say you have determined that your stop needs to be 30 pips. The question now is "How much is each of those pips worth?".

I don't use Oanda, so bear with me if the following isn't exactly right.

1 Standard lot = 100,000 units
1 Mini lot = 10,000 units
1 Micro lot = 1000 units

Anything less than 1000 units is non-standard and is a function of Oanda.

To get the pip value, divide the lot size in units by 10,000.

For a standard lot this would be 100,000 / 10,000 = $10 pip
For a mini lot this would be 10,000 / 10,000 = $1 per pip
For a micro lot this would be 1,000 / 10,000 = $0.10 per pip
For 100 Oanda lots this would be 100 / 10,000 = $0.01 per pip

(for pairs NOT ending with xxx/USD, the pip value will be about 90% of the values shown above)

I doesn't matter that much which lot size you choose, because the dollars risked will turn out roughly the same. Let me run it through for a mini, a micro and for oanda lots:

Mini Lot pip value = $1.00 * 30 pip stop = $30.00
Position size = $2000 / $30.00 = 66.666 Mini lots.
For increased safety, round it DOWN to 66 Mini lots. (never round up)
So you would enter the trade with 66 mini lots which equals 660,000 units.

Micro lot pip value = $0.10 * 30 pip stop = $3.00
Position size = $2000 / $3.00 = 666.66 Micro lots.
For increased safety round it DOWN to 666 micro lots.
So, you would enter the trade with 666 micro lots which equals 666,000 units.

Oanda "lot" size of say, 123 units:
Pip value = 123 / 10,000 = $0.0123 * 30 pip stop = $0.369
Position size = $2000 / $0.369 = 5420 lots times 123 units per lot = 666,660 units.

As you can see, the smaller your lot size, the finer control you have over your position size. (660,000 vs 666,000 vs 666,660) That is a major advantage! The smaller you can make your lot size, the less you will suffer the detrimental effects of Asymmetrical Leverage. Relax, asymmetrical leverage is beyond the scope of this post. All you need to remember is the smaller your lot size, the better.

Dial


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Originally posted by Diallist in another thread.

Stops will not protect you from leverage that is too high. It will actually hurt you by depleting your account faster. Why? Because in order to reduce the amount of dollars lost, you will have to set a stop loss that is smaller than the technicals for that trade allow. The odds of your stop getting hit increase enormously. You will get stop after stop after stop, until your account is decimated.
The correct sequence is this:
FIRST Determine your stop in pips,
SECOND determine your position size based on percent risk and
THIRD see what your resultant leverage is. If the resultant leverage is too high, then lower your percent risk for the given stop size.

Notice that leverage comes LAST not FIRST. If you put leverage first you are jeopardizing your account. Let me attempt to illustrate with a couple of examples.

The Correct Way (Trader 1)
Account size = $10,000
Currency = EUR/USD (just so I can use simple numbers)
Stop (based on technicals) = 30 pips
Risk = 2% of your Account = $200
Lot size = Mini = 10,000
Pip value for a Mini lot on EUR/USD = $1
Stop of 30 pips * $1 per pip = $30
Position size = $200 / $30 = 6.67 mini lots.
Since you cannot trade fractional lots (forget Oanda) you must round the position size DOWN to 6. Always round down to be more conservative.
True Leverage = Position Size / Account Size = 60,000 / 10,000 = 6:1
This level of leverage is too high if you lack experience. Better to reduce your percent risk from 2% down to 1%. That will reduce the leverage to 3:1 in this case.


The Wrong Way (Trader 2)
I want to get rich fast, so I want $50 a pip. Therefore, I will trade five standard lots of 100,000!
Leverage = 500,000 / 10,000 = 50:1 (Yeehaw! Now we're cookin'!)
Risk = 2% of $10,000 = $200
Okay, let's see, $200 / $50 per pip = a stop size of 4. Huh? Shoot! My broker wont let me set a stop size less than 10 pips. Aw what the hell! I'll risk 10 pips times $50 per pip for $500 risk. That's not bad. It's only 5% of my account. I'll go for it 'cause I KNOW this trade is a hot one!

Thirty seconds after this trade is placed, the market moves violently in the WRONG direction due to a terrorist bombing in Toledo. Bye bye $500.

Fast forward. Both traders have had a bad week. They've each placed 5 losing trades in a row. The score?

Trader 1
Starting Balance = $10,000
Ending Balance = $9,000
% drawdown = 10%
% gain needed to recover = 11.11%

Trader 2
Starting Balance = $10,000
Ending Balance = $7,500
% drawdown = 25%
% gain needed to recover = 33.33%

Trader 2 has a larger drawdown, paid more in spread and needs a gain THREE times larger to recover.

TO MAKE PROFIT YOU HAVE TO BE IN THE GAME.
TO BE IN THE GAME, YOU HAVE TO HAVE AN ACCOUNT.
WHO'S GONNA BE OUT OF THE GAME FIRST, TRADER 1 OR TRADER 2?

The bottom line is this:

Amateur traders look at how much they can make.
Professional traders look at how much they can lose.

Amateur traders try to increase profits by raising leverage.
Professional traders protect their capital by lowering leverage.

Amateur traders try to make each trade a big winner.
Professional traders know that individual trades (win or lose) are meaningless.

Amateur traders become one of the 95% who lose all their money.
Professional traders become one of the 5% who get rich in the long run

Amateur traders count on luck and hope to win.
Professional traders count on the statistical edge of their trading method to win using low leverage combined with compounding over a long series of trades.

Amatuers lose.
Professionals win.

Which do you want to be?

Back when I was using too much leverage, I knew it, but only reduced it a little and not enough. What changed me? A single sentence from Fiji cautioning me that high leverage would eventually bite me. Why did it only take a single sentence from Fiji? Because I have enough sense to realize that Fiji is where I want to be (His trading success, not the island he lives on, although that would be nice too )

Listen to Fiji, he offers his help for free that no one could afford to pay for if he chose to charge for it. The same is true for all the successful traders on this forum. They don't have to be here. They are here because they want to help. Don't anyone be a fool and not listen to Fiji or any of the others.

If all the successful traders are telling you NOT to use high leverage, then that should be reason enough to heed their advice now without understanding why. The understanding will come later. Take it on faith for now and keep your leverage below 3:1 if you are a newbie.

Here's one more thing using the correct example (for Trader 1) given above, but with varying stop size:

Account Size = $10,000
Percent Risk = 2% = $200

Stop MiniLots Leverage
30 6 6:1
25 8 8:1
20 10 10:1
15 13 13:1
10 20 20:1

It is given that 30 pips is the correct stop for this trade based on technicals (support/resistance, trendlines, pivot levels, fibonacci levels and price action just to name a few).

It is therefore inappropriate to reduce the size of the stop just to get a higher leverage. Yet this is what amateurs do. They say to themselves, Hey! I can risk the same amount of money ($200) and get $20 a pip instead of a measley $6 a pip. I'm gonna do it!

Big mistake. Your stops will get hit more often and will gradually wear away your account over time. Don't do it.

Okay, have I thoroughly confused everyone? Ask more questions if you still don't understand why you do NOT want to use high leverage.

Dial

Ive just read the money management thread and im still a little confused about the use of low leverage. Once I have demo'ed for a while im going to deposit $1000 to a mini or micro account. I know that I shouldn't risk more than 2% of this per trade, which is $20. If i use leverage of 3:1, does this mean that per trade my lots will be 3 x $20 = $60? I dont think it does as this would only make me extremely small profits. Can anyone please advise?

Thanks in advance

Hi Arcane,
I just noticed your PM at the same time as I saw this post, since the wording is nearly identical, I'll answer here for the benefit of others.

Before I get to your actual question, allow me to emphasize one very important point. Don't open a mini account unless your account is over $30,000. The farther below $30,000 your account balance is on a mini account is the same degree to which you'll suffer from the adverse effects of asymmetrical leverage. I wont go into what asymmetrical leverage is in this post because it doesn't directly pertain to your question. Let it be sufficient to know that you should open a micro account.

Asymmetrical leverage aside, with only $1000 in your account, you should open a micro account over a mini for another reason as well. With a mini account, trading 1 mini lot on a $1000 account would mean you would be trading at 10:1 true leverage out the starting gate. This is too high for a beginning trader. You will lose your $1000. By starting with a micro account, you'll be able to trade 1 micro lot on a $1000 account at 1:1 leverage. Much more conservative. You will most likely still lose your $1000, but it will last longer, allowing you to place more trades and learn a valuable lesson from each trade.

Go ahead and get it fixed firmly in your mind that the $1000 you are putting up is tuition money to pay for your trading education. You want to get the most bang for your buck, so go with a micro account.

In your question above you said:


So what? Your objective at this early point in your trading career is not to make money. Forget the money. Your total focus at this point should be on learning how to trade. You learn to trade by reading lots of good information and then going out and actually putting on a trade. When the market kicks your butt, as it will, you will then have a little "aha!" moment where your personal experience will reinforce what you've read and make it yours. So, hopefully you'll be less likely to make the same mistake again, or at least strive to make that mistake with decreasing frequency. To learn a lot, read a lot then trade a lot to make mistakes a lot. So what you are really purchasing with your $1000 tuition money is the opportunity to experience educational mistakes. You want to have the opportunity to make as many mistakes as possible with that $1000, so open a micro account. Period.

Now on to your question proper. Go back and read my two posts in the money management sticky again. Get out pencil and paper and go through a bunch of "what if" calculations until you understand the math. Believe me when I say that this area of relating account size, percent risk, stop size and leverage was very difficult for me to grasp and took me a long time. I just could not see what my account size had to do with anything. My reasoning was, "the market doesn't know the size of my account, so why should it matter?" Two blown accounts later, the concepts finally started to sink in. If my feeble attempts to explain what is puzzling you can save you from blowing an account then it is time well spent.

Okay, you asked:


No, that is not correct. Your leverage does not affect your % risk. Your $20 risk will remain $20 regardless of leverage, but if your leverage is too high, you will lose your $20 quickly with just a small move of the market. You need to use low leverage to give the market room to move against you a bit before taking off in your favor.

In your question, you mentioned account size, risk amount and leverage, but you left out two important pieces and that is stop size in pips and pip value.

Lets add those two essential elements in and then walk through your example.

Account Size = $1000
Percent Risk = 2%
Amount Risked = $1000*.02 = $20
Stop size = 30 pips
Pip value = .10 (10 cents on a micro account)
Total pip value = 30 pip stop * .10 = $3.00
Position size = $20/$3 = 6.67 micro lots (round down to 6)
Resultant pip value = .6 (60 cents per pip)
Resultant leverage = $6000 position size / $1000 account size = 6:1

In my opinion, a raw beginner should not trade over 5:1 leverage. Therefore you should lower the leverage by decreasing your percent risked to 1%

Now you have this:

Account Size = $1000
Percent Risk = 1%
Amount Risked = $1000*.01 = $10
Stop size = 30 pips
Pip value = .10 (10 cents on a micro account)
Total pip value = 30 pip stop * .10 = $3.00
Position size = $10/$3 = 3.33 micro lots (round down to 3)
Resultant pip value = .3 (30 cents per pip)
Resultant leverage = $3000 position size / $1000 account size = 3:1

Assume that a winning trade yields 100 pips.

In the first example above, you could lose $18 or win $60.

In the second example above, you could lose $9 or win $30.

From this it is apparent that leverage affects the rate at which you win or lose over a given pip movement.

As shown above, account size, stop size, percent risk and pip value are the input variables. The resultant output variables are position size and leverage. You adjust the input variables to achieve desireable output variables. What is a desireable output variable? It is one which lets you stay in the game for the greatest number of trades. And this is done by preserving capital so you can trade again tomorrow.

And THAT is (or should be) the number one objective for all traders whether beginner or expert. Preservation of capital is far, far more important than making money, for without captital you can make no money at all!

Does this help?

Dial