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Newbie's Mistakes

  • #1
  • First Post: Mar 28, 2005 12:53pm Mar 28, 2005 12:53pm
Been reading alot of threads about trading and newbies coming in. Just to advise you newbies out there the biggest and most common mistake by newbies is OVER LEVERAGE. Leverage used correctly is your greatest investment tool, used incorrectly it becomes an investment weapon of mass destruction and will blow you newbie's up. The higher the leverage the faster the equity swings and less time to react so its best to have a plan and not exceed certain open positions to protect your account the whole time.
This market is the toughest to learn with the longest learning curve required to get it right. So you must preserve your capitol in order to give you the time required to be comfortable with discipline.
Trading should be FUN, If not your playing over your head !
  • #2
  • Mar 28, 2005 4:06pm Mar 28, 2005 4:06pm
nice post!

leverage is VERY dangerous UNLESS you understand it. then it becomes your friend.
Relax and be happy.
  • #3
  • Mar 30, 2005 12:51am Mar 30, 2005 12:51am
Quoting merlin
nice post!

leverage is VERY dangerous UNLESS you understand it. then it becomes your friend.
Merlin, please check me and see if I am understanding leverage correctly.

To me, true leverage is position size divided by account size. For example if I have a trade with three mini lots ($30,000) and an account size of $10,000, then the true leverage is 3:1. With an account size of $20,000 it would be 1.5:1.

Until recently, I thought anything under 5:1 was OK. But, after reading Fijitraders comments on asymmetrical leverage and trade granularity, it seems that true leverage should be no more than 1:1 and preferable 0.5:1. In other words, if I'm trading 10K lots, then my account size should be, at the very minimum, $10,000 and preferably $20,000.

As to the leverage quoted by forex brokers, the only effect I can see that has is the amount of margin required per lot. If that is true, and I'm keeping my true leverage at 1:1 or smaller, then it seems I'd want the 400:1 leverage option from the broker so I'd get the lowest margin requirement. For example, if I am trading 10K lots with a true leverage of 0.5:1, then 400:1 leverage would mean each lot's margin would only be $25. Whereas if the leverage was 50:1, then the margin per lot would be $200. Why wouldn't I want the 400:1?

Thanks in advance for your comments.

Diallist
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  • #4
  • Mar 30, 2005 5:46am Mar 30, 2005 5:46am
These you understand:

LEVERAGING: Power gained over a resource greater than that one actually owns.
BENEFIT: The percent of equity needed to trade is minimal due to the amount of leverage available. Risk Management is more achieveable based on toleration or comfort level required by the investor.
GEAR RATIO is a good way to understand leverage. If you have a car in 10th gear it will go much faster than if its in 1st gear. The higher the leverage or gear the faster the speed and the less time to react. It is the same thing with Forex, the more lots, the faster the speed; each lot increases leverage or gear ratio.

Your mistake is when thinking the higher facility the better. When trading spot 4x it isnt necessary to have 400:1 if your speaking of only minimum leverage. Your used margin vs your usable margin is not a factor if leveraging less than 10:1. Most firms only pay interest credits when on right side of differential with lower margin requirements. Whether you pay $200 per mini used margin or $25 per mini lot, it should never influence your rate of return or decision on how long you hold. What matters most is to recieve interest credits if your trend or carry trading, doesnt matter if your day trading.
If your usable margin % is more than 80% your trading decsions due to margin will never come into account and affect your open position.
Trading should be FUN, If not your playing over your head !
  • #5
  • Mar 30, 2005 2:29pm Mar 30, 2005 2:29pm
Quoting diallist
Merlin, please check me and see if I am understanding leverage correctly.

To me, true leverage is position size divided by account size. For example if I have a trade with three mini lots ($30,000) and an account size of $10,000, then the true leverage is 3:1. With an account size of $20,000 it would be 1.5:1.

Until recently, I thought anything under 5:1 was OK. But, after reading Fijitraders comments on asymmetrical leverage and trade granularity, it seems that true leverage should be no more than 1:1 and preferable 0.5:1. In other words, if I'm trading 10K lots, then my account size should be, at the very minimum, $10,000 and preferably $20,000.

As to the leverage quoted by forex brokers, the only effect I can see that has is the amount of margin required per lot. If that is true, and I'm keeping my true leverage at 1:1 or smaller, then it seems I'd want the 400:1 leverage option from the broker so I'd get the lowest margin requirement. For example, if I am trading 10K lots with a true leverage of 0.5:1, then 400:1 leverage would mean each lot's margin would only be $25. Whereas if the leverage was 50:1, then the margin per lot would be $200. Why wouldn't I want the 400:1?

Thanks in advance for your comments.

Diallist
yeah you understand it right. i always get the highest leverage possible (if they are offering 400:1 with no disadvantage, then by all means i get it). just because you have an account with 400:1 leverage doesnt mean you are going to use that leverage, but its nice to have in reserve. personally i like to keep as little as possible in my FX accounts because they are unregulated and disaster could strike at any moment. high leverage helps me do this. i may, for instance, have a 50k account, 40k of it in a savings account and 10k at the broker. i still trade that 10k as if it were 50k, but because of leverage i dont need to have all my cash with the broker. if i have a down month i will add funds from the savings account to the brokerage, and in a up month i do the opposite. this is why i say if you understand leverage it can become your friend. everything i do is caculated to the penny so at all times i understand where i stand as far as risk exposure. but leverage its very very very dangerous when misunderstood, so be careful out there!!!
Relax and be happy.
  • #6
  • Mar 30, 2005 2:32pm Mar 30, 2005 2:32pm
Quoting diallist
true leverage is position size divided by account size.
can be looked at that way for sure. leverage, in the literal sense, is how much of an asset you can control with your cash. its simpler when applied to stocks...if i am able to buy 20k worth of stock using only 10k of cash, i am being given 2:1 leverage.
Relax and be happy.
  • #7
  • Mar 30, 2005 3:19pm Mar 30, 2005 3:19pm
Thought this would be helpful

Trading As a Business
  • #8
  • Mar 30, 2005 6:23pm Mar 30, 2005 6:23pm
Quoting merlin
yeah you understand it right. i always get the highest leverage possible (if they are offering 400:1 with no disadvantage, then by all means i get it). just because you have an account with 400:1 leverage doesnt mean you are going to use that leverage, but its nice to have in reserve. personally i like to keep as little as possible in my FX accounts because they are unregulated and disaster could strike at any moment. high leverage helps me do this. i may, for instance, have a 50k account, 40k of it in a savings account and 10k at the broker. i still trade that 10k as if it were 50k, but because of leverage i dont need to have all my cash with the broker. if i have a down month i will add funds from the savings account to the brokerage, and in a up month i do the opposite. this is why i say if you understand leverage it can become your friend. everything i do is caculated to the penny so at all times i understand where i stand as far as risk exposure. but leverage its very very very dangerous when misunderstood, so be careful out there!!!
Thank you Merlin! I always feel better when my thoughts are validated by a Master!
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  • #9
  • Mar 30, 2005 6:25pm Mar 30, 2005 6:25pm
Quoting phillyforex
Thought this would be helpful

Trading As a Business
Craig!

God bless you man! I have been looking for that series of articles for weeks now! I couldn't remember the name!

Thanks

Charles
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  • #10
  • Mar 31, 2005 11:30pm Mar 31, 2005 11:30pm
Quoting capitolflow
These you understand:

LEVERAGING: Power gained over a resource greater than that one actually owns.
BENEFIT: The percent of equity needed to trade is minimal due to the amount of leverage available. Risk Management is more achieveable based on toleration or comfort level required by the investor.
GEAR RATIO is a good way to understand leverage. If you have a car in 10th gear it will go much faster than if its in 1st gear. The higher the leverage or gear the faster the speed and the less time to react. It is the same thing with Forex, the more lots, the faster the speed; each lot increases leverage or gear ratio.

Your mistake is when thinking the higher facility the better. When trading spot 4x it isnt necessary to have 400:1 if your speaking of only minimum leverage. Your used margin vs your usable margin is not a factor if leveraging less than 10:1. Most firms only pay interest credits when on right side of differential with lower margin requirements. Whether you pay $200 per mini used margin or $25 per mini lot, it should never influence your rate of return or decision on how long you hold. What matters most is to recieve interest credits if your trend or carry trading, doesnt matter if your day trading.
If your usable margin % is more than 80% your trading decsions due to margin will never come into account and affect your open position.
Thanks Cap for the detailed reply, you make good points.
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  • #11
  • Apr 3, 2005 10:40pm Apr 3, 2005 10:40pm
Thanks!

I am also newbie for this field

Hope could learn about more soon
  • #12
  • Last Post: Sep 1, 2006 10:27am Sep 1, 2006 10:27am
another mistake is : not calme ! when you lose , you want to win and when you want to win you continue to lose !
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