Is a Trade w/ 5% Risk Made Impossible on 50:1 Leverage Accounts? | Forex Factory

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Is a Trade w/ 5% Risk Made Impossible on 50:1 Leverage Accounts?

  • #1
  • First Post: Aug 16, 2012 3:10pm Aug 16, 2012 3:10pm
I just just running some figures through a calculator to see what everyone complaining about the 50:1 leverage rules were seeing and now I'm really confused.

It seems as if you couldn't do something as simple as take a 5% trade.

Here's what I'm seeing. If you had a $1,000 account and wanted to place a trade that risked a total of $50 (5%) matched to a 10 pip stop loss, then you'd need to secure a 0.50 lot position.

This would require $1,235 in required margin. That's more than is in the account! Doesn't make sense to me. Can someone explain where my thinking is bent on this?
  • #2
  • Aug 17, 2012 3:44am Aug 17, 2012 3:44am
Yes, you are completely right. 1:50 wouldn't be enough to open a 5% risk position with 10 pips stop-loss and $1,000 account.

On the other hand, it would be possible to open a positions with 100 pips stop-loss and the same conditions as above. Or the same position as above with $2,000 account. Or 2.5% risk instead of 5%. You get the idea...
  • #3
  • Aug 17, 2012 5:57am Aug 17, 2012 5:57am
Quoting FXAssassin
I just just running some figures through a calculator to see what everyone complaining about the 50:1 leverage rules were seeing and now I'm really confused.

It seems as if you couldn't do something as simple as take a 5% trade.

Here's what I'm seeing. If you had a $1,000 account and wanted to place a trade that risked a total of $50 (5%) matched to a 10 pip stop loss, then you'd need to secure a 0.50 lot position.

This would require $1,235 in required margin. That's more than is in the account! Doesn't make sense to me. Can someone explain...
not sure what the problem is. There is no other market offering such kind of leverage. Be happy that you can get a 50:1 leverage.

Also be happy that you don't need to pay interest on that leverage and not provide collateral or provide a personal guarantee, like in real estate or if you open up a company. You normally need to take out a loan to "leverage yourself up" to a significant size.

Really don't understand what everybody complains about.
  • #4
  • Aug 17, 2012 11:13am Aug 17, 2012 11:13am
Quoting FXAssassin
I just just running some figures through a calculator to see what everyone complaining about the 50:1 leverage rules were seeing and now I'm really confused.

It seems as if you couldn't do something as simple as take a 5% trade.

Here's what I'm seeing. If you had a $1,000 account and wanted to place a trade that risked a total of $50 (5%) matched to a 10 pip stop loss, then you'd need to secure a 0.50 lot position.

This would require $1,235 in required margin. That's more than is in the account! Doesn't make sense to me. Can someone explain...

Hi fx... I posted in another thread... You should be able to trade 0.50 with (50 000 units ) with a 50:1 leverage...but not all pairs... only the ones that start with usd and some others. If you place an order of 0.50 eur/usd you are trying to work with aprox 61500 units of usd. .. and that is above the 50 000 units.... .. something like 0.39 would be the max you could buy eur/usd at today price.
If your deposit was in euros... sure.. you would be able to buy 0.50 eur/usd. I have never gone thru the details. I assume the credit/leverage that brokers grant is according in units of your deposit currency.

J.
  • #5
  • Aug 17, 2012 3:23pm Aug 17, 2012 3:23pm
Thanks J.

The issue is that my strategy is structured on a 10 pip S/L and a 20 pip T/P for a 1:2 R/R ratio.

I use a stair step money management plan which, at the lower range of any level, dictates a commitment of 5% of the account balance for a pariticular trade. At the upper range of any level it dictates only 2.5% of the account balance.

The thing is that the system is designed on trading BOTH the E/U and the G/U. Successful implementation of the system requires that one open only one position in either pair at a time until a 10 pip profit point has been reach at which point the S/L is moved to B/E on the initial pair and it's possible to consider scaling in a second position.

For the system to work, one must take EVERY signal. That means that if a signal for both E/U and G/U happen concurrently and they happen when the money management level dictates a 5.0% commitment for each position....well, you can see how the margin requirements could be and issue.

Of course, we then start trying to "tinker" with the system to try and fit the leverage requirements. Here's some thoughts:

1) Only Trade One Pair - this isn't an option as the system is design in such a way that wins on one pair offset losses on the other. Only trading one pair when signals for both are present means you're not trading the system...you're trading a different system.

2) Tinker With Money Management - why not trade smaller position size on the second pair when signals for both are present? This is actually worse than the first option as the entire systems is built around the money management plan more than the actual signals. Tinkering with money management means that win and loss weights don't work out as they are suppose to.

3) Cut position size in half relative to account size - this is a realistic option but would really require you to have an account size 4x larger than originally specified. Also, the account would grow at 1/2 to 1/4 the rate that it would if run according to the original system profile.

All-in-all...the system works most efficiently as designed which means higher leverage makes sense.
  • #6
  • Aug 17, 2012 3:55pm Aug 17, 2012 3:55pm
So what you're going to do now? It seems this system is not for the 50:1 leverage FX markets (unless you trade USD/MXN and the like where you can open 50000 units with 1K deposit). Halving the possie sizes seems to be the only realistic option.

10 pip SL with 5% at risk ... my friend, keep an eye on the news calendar because a spread widening at news releases, well that can be a pain in the backside with such tight stops.
Quoting FXAssassin
3) Cut position size in half relative to account size - this is a realistic option but would really require you to have an account size 4x larger than originally specified. Also, the account would grow at 1/2 to 1/4 the rate that it would if run according to the original system profile.
forget about tomorrow, just steal away into the night
  • #7
  • Aug 17, 2012 4:39pm Aug 17, 2012 4:39pm
Why not just increase your capital from $1,000 to, let's say, $5,000 and be able to trade your strategy?
  • #8
  • Aug 17, 2012 7:42pm Aug 17, 2012 7:42pm
Quoting Custos
not sure what the problem is. There is no other market offering such kind of leverage. Be happy that you can get a 50:1 leverage.

Also be happy that you don't need to pay interest on that leverage and not provide collateral or provide a personal guarantee, like in real estate or if you open up a company. You normally need to take out a loan to "leverage yourself up" to a significant size.

Really don't understand what everybody complains about.
What YOU fail to understand is that it isn't the leverage; it's the regulation. I think 50:1 leverage is the greatest thing since peanut butter. It's fantastic.

But WHY should US traders be limited ? Limited to 50:1 ? Can't trade gold/silver spot.

If all you want to do is go along with more regulation for retail traders then you're helping regulate yourself out of business.

If regulators want to regulate something important then fine. Regulating margin and banning US traders from spot gold/silver IS NOT IT.
When the Joker is in the deck.. fear not and play it well
  • #9
  • Aug 17, 2012 8:14pm Aug 17, 2012 8:14pm
Quoting FXAssassin
1) Only Trade One Pair - this isn't an option as the system is design in such a way that wins on one pair offset losses on the other. Only trading one pair when signals for both are present means you're not trading the system...you're trading a different system.
No clue why you use EU and GU to offset losses.
Since the Euro is in problems there is hardly any correlation between the 2 pairs anymore.
New voice message: Why are you calling me? If I need you, I'll call you!
  • #10
  • Aug 17, 2012 8:17pm Aug 17, 2012 8:17pm
enivid....that's a distinct possibility. The issue is that, even if you have a super-successful system and the successful closed trade rates were the same, the account wouldn't grow as fast over time relative to the size of the account.

Compounding up taking 5% trade positions will go much faster over time than compounding up taking 1% trade positions....which is what you do when you boost the capital by a factor of five.
  • #11
  • Aug 18, 2012 4:07am Aug 18, 2012 4:07am
Quoting Slim Buffett
What YOU fail to understand is that it isn't the leverage; it's the regulation. I think 50:1 leverage is the greatest thing since peanut butter. It's fantastic.

But WHY should US traders be limited ? Limited to 50:1 ? Can't trade gold/silver spot.

If all you want to do is go along with more regulation for retail traders then you're helping regulate yourself out of business.

If regulators want to regulate something important then fine. Regulating margin and banning US traders from spot gold/silver IS NOT IT....
of course leverage is tied to regulation. When is leverage not tied to regulation?
how low can they go? maximum 25:1 which corresponds to the futures markets. Still fantastic leverage for free.
I personally don't care about the US traders. But they can always go to the futures markets to trade, not sure what the problem is.
  • #12
  • Aug 18, 2012 4:59am Aug 18, 2012 4:59am
Quoting FXAssassin
enivid....that's a distinct possibility. The issue is that, even if you have a super-successful system and the successful closed trade rates were the same, the account wouldn't grow as fast over time relative to the size of the account.

Compounding up taking 5% trade positions will go much faster over time than compounding up taking 1% trade positions....which is what you do when you boost the capital by a factor of five.
You are right. But with 1:200 leverage it would go even faster. And with 1:400 twice faster than with 1:200. And, you know, there is even a broker with 1:2000 leverage. The point is the TS's complaint looks rather strange to me. 1:50 is still twice as much as 1:25. Or 50x much as no leverage at all.
  • #13
  • Aug 18, 2012 7:45am Aug 18, 2012 7:45am
Leverage and potential profits are not positively correlated. Remember, the profit potential depends on the system (assuming that it works as designed) and if the system requires the ability to open two 5% positions with a 10 pip stop loss simultaneously, then then the minimum required leverage is 200:1.

Anything over that will not increase the performance of the system because it will just be extra leverage that remains unused. Anything less than this amount will destroy the system because it cannot operate as designed. It's very much an all-or-nothing type of situation.
  • #14
  • Aug 18, 2012 9:54am Aug 18, 2012 9:54am
Quoting FXAssassin
Leverage and potential profits are not positively correlated. Remember, the profit potential depends on the system (assuming that it works as designed) and if the system requires the ability to open two 5% positions with a 10 pip stop loss simultaneously, then then the minimum required leverage is 200:1.

Anything over that will not increase the performance of the system because it will just be extra leverage that remains unused. Anything less than this amount will destroy the system because it cannot operate as designed. It's very much an...
What? why all or nothing? Just because one can't open two 5% positions, doesn't mean that a system is suddenly not profitable anymore.
If maximum profits are reached at 5% position size, then using less percentage will just reduce profits, but by no means will it destroy the system. The expectancy should stay the same, no matter how many percent you use (from >0% to <=5%).
However, once we are trying to trade more than the optimal position size of i.e. 5%, then it might be that the system becomes unsustainable and the MM would destroy the expectancy of the system.
  • #15
  • Last Post: Aug 18, 2012 12:48pm Aug 18, 2012 12:48pm
Quoting Custos
What? why all or nothing? Just because one can't open two 5% positions, doesn't mean that a system is suddenly not profitable anymore.
If maximum profits are reached at 5% position size, then using less percentage will just reduce profits, but by no means will it destroy the system. The expectancy should stay the same, no matter how many percent you use (from >0% to <=5%).
However, once we are trying to trade more than the optimal position size of i.e. 5%, then it might be that the system becomes unsustainable and the MM would destroy the expectancy...
You're right. Cutting the position size relative to the account size would
not prevent the system from being profitable. It just wouldn't be optimal. Increasing the position size past the original parameters would yield unpredictable results. Might be more profitable....but the drawdown would potentially be very large. As it is, the drawdown is extensive already.
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