Information For Beginners

Quoting ArcaneInvestoR

Disliked

Awesome post Dial, some great advice and info there, this has helped me understand leverage abit better.

I was an online gamer about a year ago for 2 years, but I decided to quit because I realised that there was not much point in devoting most my time (sometimes 12+ hours a day) to playing a game which in the real world would get me nowhere.

Since coming across Forex about 2 weeks ago I have been completely engrossed by the subject I am also getting that feeling which I used to get when I first started a new online game. Also after finding the Forex Factory I sense that there is a great community here, which is similar to that from previous games I have played.

The point I’m getting at is, I’m going to treat Forex as a game and focus not on money but on trading and as an art which to master. I will probably lose money on the way but I know that making mistakes, as long as I learn from them, would just make me a better, more skilled trader. Besides all that online trader sounds much more impressive than online gamer

Thanks again Dial, you too East for the reply!

Arcane.

Ignored

Quoting diallist

Disliked

Does this help?

Dial

Ignored

Quoting ns_karthik

Disliked

i am sorry but what is all this leverage?? i have traded in fxcm with a mini account where one lot is 10k units whereas in a normal account one lot is 100k units...and the leverage was 1:200 which means that i have to pay $50 as margin for every lot that i buy.....i thought it was as simple as that....so what is this micro lot?? can anyone explain??

Ignored

Quoting ns_karthik

Disliked

thanks a lot for the reply but am still a bit confused....lemme put it this way...lets say that i have a mini account with 200:1 broker leverage....how much margin money would i have to pay the broker to buy 1 lot?? and what connection does this have with my account balance (if its say $1000) ?? my understanding is that for the above situation, the margin money would be $50 (whatever my account balance is)...which leaves $950 still in my account...is that right??

Ignored

Quoting ns_karthik

Disliked

thanks a lot for the reply but am still a bit confused....lemme put it this way...lets say that i have a mini account with 200:1 broker leverage....how much margin money would i have to pay the broker to buy 1 lot?? and what connection does this have with my account balance (if its say $1000) ?? my understanding is that for the above situation, the margin money would be $50 (whatever my account balance is)...which leaves $950 still in my account...is that right??

Ignored

Quoting diallist

Disliked

Balance = $1000, Equity = $1000 (No trades are open)
Balance = $1000, Equity = $996 (You opened a 1 lot trade and paid $4 spread)
Balance = $1000, Equity = $1000 (The trade has moved 4 pips in your favor to breakeven)
Balance = $1000, Equity = $1005 (The trade has moved another 5 pips in your favor and you are $5 in profit)
Balance = $1005, Equity = $1005 (You've closed your trade and realized your profit. Only now does your balance change)

Ignored

Quoting diallist

Disliked

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

Ignored

Quoting Qucimann

Disliked

Hi Dial
I have just read your old post on money management and leverage. It is really great and thousand of thanks for it. A suggestion though- It will pay if you could collect papers like this one under cover, with a little more effort you will be in the house of : Forex Money Management. It will be nice to read you under cover. Good luck.

Ignored