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Margin Confusion?

  • #1
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  • First Post: Apr 30, 2013 12:10pm Apr 30, 2013 12:10pm
Hi, I'm fairly new to the game and I'm a bit lost. I've read somewhere that you should risk only 2% per trade, but why is buying (or selling) on margin offered? If only 2% is used on a trade doesn't that make it really difficult to get any sort of significant return? Excuse my ignorance, but I would love it if some of you would share your knowledge with a young trader like me.
  • #2
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  • Apr 30, 2013 12:20pm Apr 30, 2013 12:20pm
Hello,

Quoting KidSupreme
Hi, I'm fairly new to the game and I'm a bit lost. I've read somewhere that you should risk only 2% per trade, but why is buying (or selling) on margin offered? If only 2% is used on a trade doesn't that make it really difficult to get any sort of significant return? Excuse my ignorance, but I would love it if some of you would share your knowledge with a young trader like me.
as I understand this (the recommendations range from 1-2%, sometimes for aggressive traders to up to 5% per trade) this is all about your money-management. Imagine you spend a lot more of your money on a trade and you get into a bad series of trades. Then your invested money melts away in no time. And you will have to put a lot more effort into compensating the losses.

Yes, it is true: If you use only small amounts of your money, the return may be slow. Here in Germany we have the saying "The first Million is the hardest ..."

Best wishes!
Curtis
PECUNIA NON OLET
  • #3
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  • Apr 30, 2013 1:32pm Apr 30, 2013 1:32pm
Quoting KidSupreme
Hi, I'm fairly new to the game and I'm a bit lost. I've read somewhere that you should risk only 2% per trade, but why is buying (or selling) on margin offered? If only 2% is used on a trade doesn't that make it really difficult to get any sort of significant return? Excuse my ignorance, but I would love it if some of you would share your knowledge with a young trader like me.
If we use some simple math and a real world example it will answer your question.

Let's say you have a one thousand dollar account and you want to risk two percent. You can risk twenty dollars on your next trade. Now say your entry method requires a forty pip stop. It will be correct for you to risk fifty cents per pip (forty pip stop, fifty cents per pip = twenty dollar loss). In order to risk fifty cents per pip you need to take a position (with the dollar as base currency) of five thousand dollars. Since your account is only one thousand you need 5/1 leverage hence the need for margin.
  • #4
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  • Last Post: Apr 30, 2013 2:50pm Apr 30, 2013 2:50pm
Exactly, and working out risk %, and with the above scenario, you would need a high leverage to set the 50 cent per pip and yes, trading with a small account balance requires a higher leverage than otherwise..
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