OK guys, I've been studying forex for almost two years now, I've read all of the "why leverage is bad!" posts (including the link to dialist's that was recently posted in this thread), numerous intro lessons on how the math behind calculating position size, $/pip, etc etc work, and the reasons people get burned on their first accounts with terrible money management. After all of that, all I can think of is:
When using price action, the market defines your stops by local S/R and/or the PA signal bar's low/high. Once you have a stop size in pips for that trade, you calculate your position size based on how much of your account you are willing to risk on that one trade (let's say you never go above 2% risked per trade). Because of the behind-the-scenes math, there is a 'true leverage' associated with this new position size and your current account size. Advanced traders recommend that newbies never go above X:1 leverage (from dialist's thread, someone said 5:1 should be the max).
Which begs the question: as long as you are getting your stops from logical places in the market (and not just saying, 'oh 50 pips is good!'), you are consistently risking only 2% or less per trade, and you are trading with a broker like Oanda that allows you to define odd-lot sizes down to the $1/lot or just rounding down a micro lot amount, why on EARTH does the "true leverage" being over 5:1 matter?
You're going to lose 2% on the trade whether or not your stop is 20 pips or 200 pips. You can say that smaller stops get hit more often than larger stops, but does that include small stops that were placed with intent? I.E. the market has tested and held 1.5000 three times already, I'm going long and the current price is 1.5020, my PA setup says I should place my stop at 1.4990. This makes much more sense than just saying "oh i'll have a 30p stop on all my trades, hyuck!"
Is this "don't go over X:1 leverage" mantra just another form of "don't risk more than 2% of your account on a single trade"? I've attached a simple chart showing some examples; hopefully it is clear enough. It assumes five trades are opened one after another with the given stop losses, never risking more than 2% per trade, and you're trading something like EUR/USD where the position size is calculated by:
[(account)*(percentage risked)*100%] / [(SL in pips)*(0.0001)]
So once again the question is: "Why does true leverage matter if you're going to lose only 2% of your account on every loser no matter the size of your stop loss in pips?"
When using price action, the market defines your stops by local S/R and/or the PA signal bar's low/high. Once you have a stop size in pips for that trade, you calculate your position size based on how much of your account you are willing to risk on that one trade (let's say you never go above 2% risked per trade). Because of the behind-the-scenes math, there is a 'true leverage' associated with this new position size and your current account size. Advanced traders recommend that newbies never go above X:1 leverage (from dialist's thread, someone said 5:1 should be the max).
Which begs the question: as long as you are getting your stops from logical places in the market (and not just saying, 'oh 50 pips is good!'), you are consistently risking only 2% or less per trade, and you are trading with a broker like Oanda that allows you to define odd-lot sizes down to the $1/lot or just rounding down a micro lot amount, why on EARTH does the "true leverage" being over 5:1 matter?
You're going to lose 2% on the trade whether or not your stop is 20 pips or 200 pips. You can say that smaller stops get hit more often than larger stops, but does that include small stops that were placed with intent? I.E. the market has tested and held 1.5000 three times already, I'm going long and the current price is 1.5020, my PA setup says I should place my stop at 1.4990. This makes much more sense than just saying "oh i'll have a 30p stop on all my trades, hyuck!"
Is this "don't go over X:1 leverage" mantra just another form of "don't risk more than 2% of your account on a single trade"? I've attached a simple chart showing some examples; hopefully it is clear enough. It assumes five trades are opened one after another with the given stop losses, never risking more than 2% per trade, and you're trading something like EUR/USD where the position size is calculated by:
[(account)*(percentage risked)*100%] / [(SL in pips)*(0.0001)]
So once again the question is: "Why does true leverage matter if you're going to lose only 2% of your account on every loser no matter the size of your stop loss in pips?"
Attached Image (click to enlarge)
Hindsight is 20/20
