Question for Dialist and everyone else | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

Dialist And His Knife System 14 replies

Question: Can win by using someone else's strategy? 20 replies

Question for Dialist and everyone else

  • #1
  • First Post: Oct 24, 2005 6:12pm Oct 24, 2005 6:12pm
Hey there....

I've been reading numerous posts on here, especially the ones by Dialist and noticed that generally most of the traders out there think that high leverage is "evil".

Dialist, in your response to one of our friends here, eastmaels (10-7-05 post) you listed 7 rules that you follow when it comes to trading. Rule #7 was about leverage. You mentioned that you used 20:1 leverage and that it was "insanity". I've also read "Bird Watching In Lion Country" where the author also states the dangers of high leverage.

My question is this:

I've always thought that Forex was known for its high leverage and for the ability to control a lot with little. I currently use CMS FX demo where they offer leverage up to 200:1. So theoretically, I can trade 200K lots with just $1000, making every move worth $20 on EUR/USD.

If I am leveraged 1:1, what will each move be? For me to make $10 a move, I would have to put in $100,000, right? If that is true, then I just don't see how this would be profitable in the long run.

Please explain this to me because I am surely not getting something.

Thanks!


-Roman
~If you fail to plan, you plan to fail~
  • #2
  • Oct 24, 2005 7:56pm Oct 24, 2005 7:56pm
Well with the higher leverage say... oh $100 pips, for every pip in the wrong direction your margin equity will be subtracted $100 for every pip so if you guess 10 pips wrong your losing $1000 plus your intial margin for the lot. what would that be $1000 or $10,000 for 100 pips? anyways higher leverage faster your account equity dwendles in the even of the market going south on your buy or sell decision.... But its way cool if you guessed the right direction lol



Mike...
***Building an EMPIRE one pip at a time***
  • #3
  • Oct 24, 2005 8:25pm Oct 24, 2005 8:25pm
Quoting gcl915
Hey there....

I've been reading numerous posts on here, especially the ones by Dialist and noticed that generally most of the traders out there think that high leverage is "evil".

Dialist, in your response to one of our friends here, eastmaels (10-7-05 post) you listed 7 rules that you follow when it comes to trading. Rule #7 was about leverage. You mentioned that you used 20:1 leverage and that it was "insanity". I've also read "Bird Watching In Lion Country" where the author also states the dangers of high leverage.

My question is this:

I've always thought that Forex was known for its high leverage and for the ability to control a lot with little. I currently use CMS FX demo where they offer leverage up to 200:1. So theoretically, I can trade 200K lots with just $1000, making every move worth $20 on EUR/USD.

If I am leveraged 1:1, what will each move be? For me to make $10 a move, I would have to put in $100,000, right? If that is true, then I just don't see how this would be profitable in the long run.

Please explain this to me because I am surely not getting something.

Thanks!


-Roman
Hi Roman,
You have asked a very important question. And I want to give it a good, solid answer because it is EXTREMELY important that you understand why you should only use low leverage. Unfortunately, I don't have time tonight, so it will have to wait a bit. In the meantime, because leverage and position sizing are so closely related, I need to make sure you understand position sizing. So for now, please read the following two posts. When you're done, post back here to let me know, and then I'll go into the use and abuse of leverage.

http://www.forexfactory.com/forexfor...2&postcount=30

and

http://www.forexfactory.com/forexfor...90&postcount=8

Remember to post back here when, you're done so I can discuss leverage.

If anyone else wants to jump in, feel free!

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #4
  • Oct 24, 2005 9:26pm Oct 24, 2005 9:26pm
Can someone do an example of a 10,000 lot, 20:1 trade gone bad 10 pips and a 50:1 trade gone bad the same 10 pips, whats the numbers if the trades had a TP at 10 pips... Once i see this I will understand fully (I hope)


Thanks Guys....



Mike...
***Building an EMPIRE one pip at a time***
  • #5
  • Oct 24, 2005 9:50pm Oct 24, 2005 9:50pm
Hey Dial,

I printed out both of your posts (my floor is now filled with Forex print-outs, but I guess the floor is just a big, low shelf for a man ). From what I understand (or think I understand) that trading smaller lots will allow me to trade of them while risking the same $ ammount if I trade say one large lot.

I am still a little confused at how you arrive at the calculations in the OANDA post. What is the dollar difference in trading 66 Mini lots or 666 Micro lots?

I am ready for your further teachings!
~If you fail to plan, you plan to fail~
  • #6
  • Oct 24, 2005 10:23pm Oct 24, 2005 10:23pm
Quoting Gyva
Can someone do an example of a 10,000 lot, 20:1 trade gone bad 10 pips and a 50:1 trade gone bad the same 10 pips, whats the numbers if the trades had a TP at 10 pips... Once i see this I will understand fully (I hope)
Thanks Guys....
Mike...
This an example I gave on another thread.....

"eg. margin 10:1 on $1000 account trading 50% of account ( not recommending that, just allowing for newbie cluelessness) means that (AUD$ is home currency):

$500 = 4000 EURUSD units Each pip = $0.54 If they lose 30 pips on a trade it costs them $16 or 1% of their capital. They can make 31 losing trades before their initial capital has dropped by 50%.

Trading @ 50:1 they can purchase 17000 units with pip value of $2.27.
30 pip loss = $68 or 7% of their capital. They can make 13 losing trades before reducing capital by 50%."

As you can see increasing leverage does 2 things:
Inreases pip value which magnifies profit OR loss
Uses less capital for same postion size ie. say you want to trade a fixed position size of 10000 units. At 20:1 on EurUsd this will cost you (margin))
$598.00
With 50:1 leverage the same unit size ties up $239 of your capital.

Even though 50:1 may your default leverage for your account, you can manipulate your actual leverage by adjusting your trade size.
eg. you have a $1000 account set at 50:1 leverage, your max size on EurUsd is approx 42000 units.
At 20:1 you max size would be 17000 units. So if you never exceed 17000 units in trade size you are effectively trading at 20:1 even though your account is set to 50:1
  • #7
  • Oct 24, 2005 11:26pm Oct 24, 2005 11:26pm
My oanda platform is really confusing me, Ok I set the leverage at 50:1 I buy a 100,000 lot and it uses $2394.48 for margin and get me $10.00 a pip....... Now I change my leverage to 20:1 make the same order it uses (after other order was closed) $2393.58 i nmargin and still gets me $10 a pip...... Something is not adding up here, please tell me I'm not crazy... is my platform not really changing my leverage even though it says it is. ANd is $2390 correct for margin on a 100,000 lot?



Thanks...


Mike...
***Building an EMPIRE one pip at a time***
  • #8
  • Oct 24, 2005 11:35pm Oct 24, 2005 11:35pm
Quoting Gyva
My oanda platform is really confusing me, Ok I set the leverage at 50:1 I buy a 100,000 lot and it uses $2394.48 for margin and get me $10.00 a pip....... Now I change my leverage to 20:1 make the same order it uses (after other order was closed) $2393.58 i nmargin and still gets me $10 a pip...... Something is not adding up here, please tell me I'm not crazy... is my platform not really changing my leverage even though it says it is. ANd is $2390 correct for margin on a 100,000 lot?
Thanks...
Mike...
you have to log off/on for changes take effect. And it doesn't matter what your leverage is 100,000 units is same value per pip. Changing leverage just increases/decreases number of units you can control per $.
  • #9
  • Oct 25, 2005 1:26am Oct 25, 2005 1:26am
[quote]
Quoting Beachie41
This an example I gave on another thread.....

"eg. margin 10:1 on $1000 account trading 50% of account ( not recommending that, just allowing for newbie cluelessness) means that (AUD$ is home currency):

$500 = 4000 EURUSD units Each pip = $0.54 If they lose 30 pips on a trade it costs them $16 or 1% of their capital. They can make 31 losing trades before their initial capital has dropped by 50%.
I find this misleading because you use two different money management ideas in the same sentence. If you are trading a %r money management system and you are betting 1% of your account per trade you can make 69 losing trades in a row before losing 50 percent of your account assuming you are always risking exactly 1 percent and each trade is a loser. However if your money mangement system such that you bet 30 pips (constant risk with increasing leverage (essentially a type of martingale system)) on every EURUSD trade only then, by your calculations you will lose 50% (16.00 per trade) of your account in 31 trades and your leverage will increase with every loss and will have doubled by the 31st consecutive loss.

However when I look at your figures I notice claim that a pip is worth .54 but I cannot figure out where you get that figure. The only thing that determines pip value is your position size. Margin has nothing to do with it. In your example of the 1000.00 account if your position size is 1000.00 your pip value is .10 and you risk 1 percent of your account you can only risk 10.00 or 100 pips. However if your risk is only going to be 30 pips your position size must be 3333.33 to risk one percent of your first trade on the 1000.00 account. The profit or loss per pip on that first trade is .3333.

Quote
Trading @ 50:1 they can purchase 17000 units with pip value of $2.27.
30 pip loss = $68 or 7% of their capital. They can make 13 losing trades before reducing capital by 50%."

The so called leverage setting that determines how much margin you must post only determines maximum leverage that you can apply to the account. It has nothing to do with pip value at all. The only thing that determines pip value is position size and the currency pair being traded. The only thing that determines risk as a percentage of your account is your account size and position size and where your exit is.

Quote
As you can see increasing leverage does 2 things:
Inreases pip value which magnifies profit OR loss
Uses less capital for same postion size ie. say you want to trade a fixed position size of 10000 units. At 20:1 on EurUsd this will cost you (margin))
$598.00
With 50:1 leverage the same unit size ties up $239 of your capital.
Position size is always measured in the base currency. With EUR/USD you always talk about position size in dollars or fractions of dollars. Units have no meaning here unless you mean dollars. Pips have no real significance either unless you have defined a position size.

Quote
Even though 50:1 may your default leverage for your account, you can manipulate your actual leverage by adjusting your trade size.
Exactly. Stick with that point and work from there. I wouldn't call it manipulating though. It is simply a fact that your leverage is always the ratio of account equity to position size. Nothing more. If you have a 1000.00 account and your trade size is 1000.00 you have 1:1 leverage or no leverage. If your trade size is 2000.00 and your account is 1000.00 your leverage is 2:1.

Quote
eg. you have a $1000 account set at 50:1 leverage, your max size on EurUsd is approx 42000 units.
At 20:1 you max size would be 17000 units. So if you never exceed 17000 units in trade size you are effectively trading at 20:1 even though your account is set to 50:1
If your leverage is 50:1 your trade size would have to be 50,000.00 on a 1000.00 account. Forget margin and you'll understand this a whole lot better. Margin is not there for the trader to use in calculating risk. It is only there to prevent the trader from trading beyond the maximum leverage the account is set to. The leverage setting on your account is pointless. It is actually a good idea to set it high, (100:1 or better) govern your risk with stops and position size, and keep the minimum amount in your account that you need to trade with. Keep the rest of your account in a bank where the funds are guaranteed. If you need more funds just wire them over.

FT
  • #10
  • Oct 25, 2005 1:27am Oct 25, 2005 1:27am
[quote]
Quoting Beachie41
This an example I gave on another thread.....

"eg. margin 10:1 on $1000 account trading 50% of account ( not recommending that, just allowing for newbie cluelessness) means that (AUD$ is home currency):

$500 = 4000 EURUSD units Each pip = $0.54 If they lose 30 pips on a trade it costs them $16 or 1% of their capital. They can make 31 losing trades before their initial capital has dropped by 50%.
I find this misleading because you use two different money management ideas in the same sentence. If you are trading a %r money management system and you are betting 1% of your account per trade you can make 69 losing trades in a row before losing 50 percent of your account assuming you are always risking exactly 1 percent and each trade is a loser. However if your money mangement system is such that you bet 30 pips (constant risk amount with increasing leverage with each loss (essentially a type of martingale system)) on every EURUSD trade only then, at least by your calculations, you will lose 50% (16.00 per trade) of your account in 31 trades and your leverage will increase with every loss and will have doubled by the 31st consecutive loss.

However when I look at your figures I notice claim that a pip is worth .54 but I cannot figure out where you get that figure. The only thing that determines pip value is your position size. Margin has nothing to do with it. In your example of the 1000.00 account if your position size is 1000.00 your pip value is .10 and you risk 1 percent of your account you can only risk 10.00 or 100 pips. However if your risk is only going to be 30 pips your position size must be 3333.33 to risk one percent of your first trade on the 1000.00 account. The profit or loss per pip on that first trade is .3333.

Quote
Trading @ 50:1 they can purchase 17000 units with pip value of $2.27.
30 pip loss = $68 or 7% of their capital. They can make 13 losing trades before reducing capital by 50%."

The so called leverage setting that determines how much margin you must post only determines maximum leverage that you can apply to the account. It has nothing to do with pip value at all. The only thing that determines pip value is position size and the currency pair being traded. The only thing that determines risk as a percentage of your account is your account size and position size and where your exit is.

Quote
As you can see increasing leverage does 2 things:
Inreases pip value which magnifies profit OR loss
Uses less capital for same postion size ie. say you want to trade a fixed position size of 10000 units. At 20:1 on EurUsd this will cost you (margin))
$598.00
With 50:1 leverage the same unit size ties up $239 of your capital.
Increasing your account leverage setting has no effect on pip value. The only thing that affects pip value is position size. Position size is always measured in the base currency. With EUR/USD you always talk about position size in dollars or fractions of dollars. Units have no meaning here unless you mean dollars. Pips have no real significance either unless you have defined a position size.

Quote
Even though 50:1 may your default leverage for your account, you can manipulate your actual leverage by adjusting your trade size.
Exactly. Stick with that point and work from there. I wouldn't call it manipulating though. It is simply a fact that your leverage is always the ratio of account equity to position size. Nothing more. If you have a 1000.00 account and your trade size is 1000.00 you have 1:1 leverage or no leverage. If your trade size is 2000.00 and your account is 1000.00 your leverage is 2:1.

Quote
eg. you have a $1000 account set at 50:1 leverage, your max size on EurUsd is approx 42000 units.
At 20:1 you max size would be 17000 units. So if you never exceed 17000 units in trade size you are effectively trading at 20:1 even though your account is set to 50:1
If your leverage is 50:1 your trade size would have to be 50,000.00 on a 1000.00 account. Forget margin and you'll understand this a whole lot better. Margin is not there for the trader to use in calculating risk. It is only there for the broker in order to prevent the trader from trading beyond the maximum leverage the account is set to. The leverage setting on your account is pointless. It is actually a good idea to set it high, (100:1 or better) govern your risk with stops and position size, and keep the minimum amount in your account that you need to trade with. Keep the rest of your account in a bank where the funds are guaranteed. If you need more funds just wire them over.

FT
  • #11
  • Oct 25, 2005 3:27am Oct 25, 2005 3:27am
[quote=fijitrader]
Quote
I find this misleading because you use two different money management ideas in the same sentence.......
FT

FT,
the original question was what how does leverage affect profit or loss. I quoted from another thread that summarizes what would happen if you decided to use 50% of your account using a 30 pip SL. MM wasn't in the equation so no specifics. A simple enough back of the hand caluculation. I'm sure most got the drift that higher leverage can mean a quicker exit.

Pip value calculations can by found on the trading platform. For the example given they're correct.

"EurUsd
7516 units make 1 PIP = 1 AUD
10000 units
1 Pip = 1.33 AUD"
so in Oanda speak 1 unit = 0.000133
Therefore more leverage allows more units allows larger pip value.
Unit value doesn't change.

Base account in AUD was noted. $1000 account can purchase maximum of 42000 units. Your looking at it from a $USD base account perspective
  • #12
  • Edited 5:06am Oct 25, 2005 4:49am | Edited 5:06am
[quote=Beachie41]
Quoting fijitrader

FT,
the original question was what how does leverage affect profit or loss. I quoted from another thread that summarizes what would happen if you decided to use 50% of your account using a 30 pip SL. MM wasn't in the equation so no specifics. A simple enough back of the hand caluculation. I'm sure most got the drift that higher leverage can mean a quicker exit.

Pip value calculations can by found on the trading platform. For the example given they're correct.

"EurUsd
7516 units make 1 PIP = 1 AUD
10000 units
1 Pip = 1.33 AUD"
so in Oanda speak 1 unit = 0.000133
Therefore more leverage allows more units allows larger pip value.
Unit value doesn't change.

Base account in AUD was noted. $1000 account can purchase maximum of 42000 units. Your looking at it from a $USD base account perspective
I guess my point is that changes in leverage ONLY come from a change in the ratio of position size to account size. All the rest of the maximum permitted leverage and margin stuff really just complicate everything and tend to confuse people and take their attention off of the essential issue that leverage is ONLY the ratio of position size to account size.

Also I thought your examples were confusing because you implied that the trade you were stating was risking 1% of the account which does not appear correct since 1 percent of 1000.00 is 10.00.

Since it was not you asking the question I thought that those clarifications would be useful for people reading because the example appears to complicate things. I still don't know how you get 1 percent risk of 1000.00 account being equal to 16.00. Even converting to AUD at current rates I get a bit more than 13.00 AUD representing 1 percent of 1000.00 US.

FT
  • #13
  • Oct 25, 2005 5:28am Oct 25, 2005 5:28am
Quoting fijitrader
[
Also I thought your examples were confusing because you implied that the trade you were stating was risking 1% of the account which does not appear correct since 1 percent of 1000.00 is 10.00.
FT
My mistake there... 1.5% approx. The example of $68 = 7% approx was correct.
cheers
  • #14
  • Oct 25, 2005 6:44pm Oct 25, 2005 6:44pm
I think I get it! ok leverage does not make pip value more, it allows you to buy more units with less money thus if a margin call was made you lose less. SO.

At 50:1 you can buy 50,000 units (eur/usd) for $1000 or
25,000 units for $500 or
12,500 units at $250.

lets try a 20:1 50,000 units for $2500 in margin, the break down
20,000 units for $1000 + 20,000 units for $1000 + 10,000 units for $500 = $25,000 for 50,000 units

The better deal of course the 50:1 correct? your risking $1500 less in capital on that trade.

Sooooooo.... wouldn't 100:1 be even better? Risking only $500 of capital for 100,000 units....

So I would think the higher the leverage the more your going to make + your going to loose less if a margin was called..... I'm I getting this?


Mike...
***Building an EMPIRE one pip at a time***
  • #15
  • Oct 25, 2005 7:19pm Oct 25, 2005 7:19pm
Quoting Gyva
I think I get it! ok leverage does not make pip value more, it allows you to buy more units with less money thus if a margin call was made you lose less. SO.

At 50:1 you can buy 50,000 units (eur/usd) for $1000 or
25,000 units for $500 or
12,500 units at $250.

lets try a 20:1 50,000 units for $2500 in margin, the break down
20,000 units for $1000 + 20,000 units for $1000 + 10,000 units for $500 = $25,000 for 50,000 units
The better deal of course the 50:1 correct? your risking $1500 less in capital on that trade.
Sooooooo.... wouldn't 100:1 be even better? Risking only $500 of capital for 100,000 units....
So I would think the higher the leverage the more your going to make + your going to loose less if a margin was called..... I'm I getting this?
Mike...

There's 2 sides to the coin, you make more, but you also lose more. If account size & stop loss are assumed to be equal, then you will be able to withstand a longer run of outs with a lower margin. There is good reason why consistently profitable traders work on lower & not higher margins.
  • #16
  • Edited 7:36pm Oct 25, 2005 7:29pm | Edited 7:36pm
Quoting Gyva
I think I get it! ok leverage does not make pip value more, it allows you to buy more units with less money thus if a margin call was made you lose less. SO.

At 50:1 you can buy 50,000 units (eur/usd) for $1000 or
25,000 units for $500 or
12,500 units at $250.

lets try a 20:1 50,000 units for $2500 in margin, the break down
20,000 units for $1000 + 20,000 units for $1000 + 10,000 units for $500 = $25,000 for 50,000 units

The better deal of course the 50:1 correct? your risking $1500 less in capital on that trade.

Sooooooo.... wouldn't 100:1 be even better? Risking only $500 of capital for 100,000 units....

So I would think the higher the leverage the more your going to make + your going to loose less if a margin was called..... I'm I getting this?


Mike...
Cool. You are getting some of it but not quite there. First your risk is not your margin. That is something you should differentiate from risk. The easiest way is just to forget about margin altogether and pretend it is not there -- at least from a risk point of view.

The reason for setting your account 100:1 or better is only so that you can have a smaller amount in your trading account and keep the rest of your trading account in the bank. Say you have 1000.00 in your trading account and another 9000.00 in the bank. Your trading account is 10,000.00. Now you base your position size on your 10,000.00 account but with 100:1 you can still trade up to almost a 100k position size if you wanted to using only the 1000.00 account. The only point of this exercise is to keep the bulk of your funds in a more reliable place than say a refco account which has no guaranted funds storage.

Try to think outside the box of "units". Try to think only in terms of position size and account size. If your account size is 10,000.00 then your position size will be calculated based on your account size and that will always tell you your true leverage. For example if you decide to risk 2 percent of your account on a trade and your account is 12,000.00 then your risk on that trade will be 240.00 REGARDLESS of any other layers of calculation such as converting units to dollars. I am unfamiliar with Oanda's extra layer of "units" but it is clear that they are not constant through different maximum permittted leverage settings whereas position size in relation to closed equity (or account size) will always be your correct determination of what your actual leverage is.

Therefore I'd never get into the habit of thinking in terms of units for calculating risk. I'd always think FIRST of a position size in dollars and as a percentage of my equity. Then I'd do any conversions required to to calculate units if I was forced to trade in units but I'd always be confirming my position size in dollars not in units. Thinking of leverage in terms of units that will represent different dollar amounts under different circumstances is less reliable and also not transportable to most other platforms. Thinking of position size in relation to account size is transportable to any platform or kind of trading and it will keep your head clear of confusing scenarios.

It is is still not clear please do not hesitate to ask more questions.

FT
  • #17
  • Oct 25, 2005 7:33pm Oct 25, 2005 7:33pm
I dont see how you lose more, the margin was $1500 cheaper. The only way I see you lose money is with less money you bought more units and with that your pips are woth more and in the even of the market going the wrong way the more valuble pips (because you bought more units) will dwendel your account faster, but you use proper stops to avoid that, so Asumming you use the correct stops how can higher leverage screw you???? I'm not seeing how it can, you get more units for your money thus making more money for +pips and just set your stops to acceptable losses and bam..... Higher leverage is a great great thing......


Higher leverage will save you more in the event of a margin call
Higher leverage will buy you more units making you more money
Higher leverage in the even of the market going south will drain your account faster only in the even that you bought more units because of the leverage. But can be protected with stops.

I'm thinking higher is better given you use your stops accordingly


Mike
***Building an EMPIRE one pip at a time***
  • #18
  • Oct 25, 2005 7:41pm Oct 25, 2005 7:41pm
I need to call one of you guys.. PM a number.. lol


Thanks...


In a nut shell I want my pips to be worth as much as they can be without having to throw up $1000's in margin I want my margin small, pips worth a ton, and I'll set my stops if the market goes the wrong way...


lol Mike.... I know this has to be so simple yet I'm rackin my brain trying to figure out what you guys are saying lol
***Building an EMPIRE one pip at a time***
  • #19
  • Oct 25, 2005 7:56pm Oct 25, 2005 7:56pm
electric savant Hop onto Yahoo messenger My screen name is Gyva02


Thanks.
***Building an EMPIRE one pip at a time***
  • #20
  • Edited Oct 26, 2005 11:46pm Oct 25, 2005 10:43pm | Edited Oct 26, 2005 11:46pm
Quoting Gyva
I need to call one of you guys.. PM a number.. lol


Thanks...


In a nut shell I want my pips to be worth as much as they can be without having to throw up $1000's in margin I want my margin small, pips worth a ton, and I'll set my stops if the market goes the wrong way...


lol Mike.... I know this has to be so simple yet I'm rackin my brain trying to figure out what you guys are saying lol
Roman, the following is for you too.

It is simple, Gyva, once you figure it out. I have to smile because it was only last year that I was where you are now. I spent many a night pacing back and forth on my patio before the light finally came on. (Not the patio light, the light of understanding) And it took more than the pacing. It took drawing two accounts down 90% to finally figure it out. Read what Fiji has posted over and over as many times as needed to gain understanding. I'll try here to put my spin on it, but I can't say it better than what Fiji has already said.

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 + spread.

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 (neglecting spread)
% drawdown = 10%
% gain needed to recover = 11.11%

Trader 2
Starting Balance = $10,000
Ending Balance = $7,500 (neglecting spread)
% 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




.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
1 trader viewing now