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I've figured out why so many people lose money in Forex

  • #481
  • Mar 7, 2015 2:23pm Mar 7, 2015 2:23pm
Quoting EarnPipsNow
{quote} Hi ProfitDaily: From what I understand, here is how some traders think: "I have $100,000 in my Forex account and I bought 1 standard lot worth $100,000, therefore my leverage is 1 to 1." With that kind of "logic", it is virtually impossible to have any meaningful discussion with these traders. No matter what you say, they are still deeply convinced that they are trading with a 1:1 leverage.
Oh! I guess I didn't understand what these people don't understand. If you wanted to control 100,000 units, and leverage were 1:1, you would need 100,000 unit(if the market moved one unit against you, you receive a margin call). But in their minds, if they wish to control 100,000 units, then one standard lot, which controls 100,000 units, is the limit for their trading? And if they only have 10,000 in their margin account, they can only trade .1 standard lots? So, if the account balance is 10,000 and he's sets his trading station at 50:1, then replaced will want to limit trading to .02 standard lots to achieve his version of "leverage", right? My head hurts.
  • #482
  • Edited 4:29pm Mar 7, 2015 3:21pm | Edited 4:29pm
Quoting GEfx
So, if the account balance is 10,000 and he's sets his trading station at 50:1, then replaced will want to limit trading to .02 standard lots to achieve his version of "leverage", right?
Correct, if their broker offers a 50:1 leverage and they have $10K in their account, they naively believe that by reducing their trading size to 0.02 standard lot they are now trading with a 1 to 1 leverage.

They now feel "safe" because they just "decreased" their leverage. It was 50:1 "before" but now it's "only" 1:1, thanks to this "clever" trick. In their mind, a 50 to 1 or a 100 to 1 leverage is "bad". Very, very "bad". According to them, traders lose because they use "high" leverage.

Of course they are only fooling themselves, the leverage is still 50:1, no matter what they do. While it is true that reducing the risk per trade to 2 or 3% of capital is an excellent thing, it still has zero effect on leverage. Leverage is only a tool that our broker gives us, how we use it and how much we risk on each trade is totally up to us.

In and of itself, leverage cannot make you lose anything. Only traders with limited knowledge keep saying that speculators fail because they use "high" leverage.

Quoting GEfx
My head hurts.
Each losing trade is an opportunity to learn
  • #483
  • Mar 8, 2015 10:45am Mar 8, 2015 10:45am
Quoting EarnPipsNow
..Forex brokers offer much more leverage to their customers than Futures brokers..
I already wrote I understand the leverage advantage. The way you wrote it before looked like there's some other positive that's why I asked.
Markets wispers, just tune in.
  • #484
  • Mar 8, 2015 1:29pm Mar 8, 2015 1:29pm
I did every possible mistake in my early days. Heck, I even do some now. I opened big positions while having dwarf equity, ending blowing up the account right after. Opened trades against the trend on the fly, regretting it right after and trying to hedge it by opening other positions and all ended again in blowing up the whole thing.

I'm very emotional, I mean really a lot. That's bad for trading. I decided to give EA a try to overcome my weakness. I tried a lot of them, even commercial ones. It was worse. The accounts were eroded slowly by those freaking robots. A few managed to make little money followed by huge losses.

I decided to give up for a while to purge my mind from all the stuff I did. Once I took a step back I realized my mistakes and why it happened. I wanted to become rich fast. I was afraid there wouldn't be any other chances if I missed that very one and felt I had to trade no matter what. Watching fast changing numbers and jumping charts effects your mind to act fast and do something, even if it's wrong!

I was blaming the markets being against me. I was blaming my environment for my lack of judgement. I was my own enemy. I still am sometimes.
  • #485
  • Mar 8, 2015 3:11pm Mar 8, 2015 3:11pm
Quoting EarnPipsNow
{quote} Correct, if their broker offers a 50:1 leverage and they have $10K in their account, they naively believe that by reducing their trading size to 0.02 standard lot they are now trading with a 1 to 1 leverage. They now feel "safe" because they just "decreased" their leverage. It was 50:1 "before" but now it's "only" 1:1, thanks to this "clever" trick. In their mind, a 50 to 1 or a 100 to 1 leverage is "bad". Very, very "bad". According to them, traders lose because they use "high" leverage. Of course they are only fooling themselves, the leverage...
Once again, still arguing semantics. You're committing the logical fallacy that a word can't mean different things. It can. The word leverage can mean a lot of different things. It could mean the action of a lever.

The most important type of leverage as far as loses are concerned is the equity to position ratio. If you have $10k and you buy a lot, that's equivalent to trading a $100k position. It doesn't matter what kind of leverage the broker offers. How much an account loses doesn't matter if the broker allows up to 500 to 1 or 10 to 1 leverage. What does matter is the ratio of equity to position.

I'm baffled that you can't understand this concept. Are you saying that there's no difference as far as risk is concerned if a 10k account takes out a 2 lot position verses a 0.1 lot position?
  • #486
  • Mar 8, 2015 3:31pm Mar 8, 2015 3:31pm
Quoting emanco
I did every possible mistake in my early days. Heck, I even do some now. I opened big positions while having dwarf equity, ending blowing up the account right after. Opened trades against the trend on the fly, regretting it right after and trying to hedge it by opening other positions and all ended again in blowing up the whole thing. I'm very emotional, I mean really a lot. That's bad for trading. I decided to give EA a try to overcome my weakness. I tried a lot of them, even commercial ones. It was worse. The accounts were eroded slowly by those...
we don't predict, we only ride
  • #487
  • Mar 8, 2015 6:06pm Mar 8, 2015 6:06pm
Quoting replaced
The word leverage can mean a lot of different things. It could mean the action of a lever.
In the financial world trading with leverage means someone is lending you money to control a relatively large position (say 100,000 units of currency) with a very small capital (say 1,000 units of currency).

THAT'S IT!

Quoting replaced
What does matter is the ratio of equity to position.
Yes, it is called the risk per trade (in percentage). And for the last time you cannot call it leverage, it is total nonsense.

Quoting replaced
Are you saying that there's no difference as far as risk is concerned if a 10k account takes out a 2 lot position verses a 0.1 lot position?
Where did I ever say that? Read my previous posts, I keep repeating that no matter what leverage the broker offers, the trader can (and should) always risk only 1 or 2 or 3% of his capital on each position. But reducing the risk per trade does NOT reduce leverage. You cannot change the leverage no matter what you do. If you believe otherwise you are only fooling yourself.
Each losing trade is an opportunity to learn
  • #488
  • Edited 7:36pm Mar 8, 2015 6:28pm | Edited 7:36pm
Quoting grin
No one lends you anything to trade.
When you buy 100,000 euros with only $1,000 (margin money), where does the $99,000 come from (assuming $1 = 1 Euro)?

When you buy a $100,000 house with only $10,000 down, where does the $90K come from?
Each losing trade is an opportunity to learn
  • #489
  • Mar 8, 2015 6:42pm Mar 8, 2015 6:42pm
Quoting grin
{quote} It is paper money. $1K is there to ensure that the settlement is smooth. When you buy a car you do not have to pay until delivery even though you control a car. Dealer only takes deposit to ensure that if you do not take the car loss is paid up. Here it is the same.
Let me put it another way.

You buy 100,000 euros with a $1,000 margin deposit.
Something extremely bad happens in Europe and the Euro loses 99% of its value in a few seconds.
How much do you owe your broker?
Each losing trade is an opportunity to learn
  • #490
  • Mar 8, 2015 7:22pm Mar 8, 2015 7:22pm
By the way, here is the exact definition of the verb "to leverage": to use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.

Which is exactly what we are doing. When we buy 100,000 euros with only $1,000 down, we are speculating with an extra $99,000 that is not coming from our pocket.
Each losing trade is an opportunity to learn
  • #491
  • Mar 8, 2015 7:25pm Mar 8, 2015 7:25pm
Quoting grin
{quote} It is paper money. $1K is there to ensure that the settlement is smooth. If you flip your house before closure date, you need no money but to cover any loss of value. ))
Try telling it to all the people caught in the Swiss frank massacre who not only got their accounts wiped out but actually are on the hook for the negative equity that supposedly to you is nothing more than 'paper money'.

I have to say I find it absurd to be arguing about the definition of leverage. For those of you still wondering about how does leverage work in forex I suggest this article:

http://www.investopedia.com/ask/answ...exleverage.asp
  • #492
  • Edited 7:56pm Mar 8, 2015 7:41pm | Edited 7:56pm
Quoting EnoFX;8121081 For those of you still wondering about how does leverage work in forex I suggest this article: [URL
http://www.investopedia.com/ask/answers/06/forexleverage.asp[/url]
Exactly.

Quote from the article : "Leverage is a loan that is provided to an investor by the broker that is handling his or her forex account. "

And if the trader loses that loan bad things will start to happen, just like the character Omar said in the movie Scarface starring Al Pacino : "... and chico, if anything happens to that buy-money, eee pobrecito..."
Each losing trade is an opportunity to learn
  • #493
  • Edited 9:17pm Mar 8, 2015 8:40pm | Edited 9:17pm
Quoting grin
If losses are greater than deposit one is still expected to cover negative balance on their trades in full.
Oh I see, so now it's not "paper money" anymore, it's "real" money.

Tell me Grin, how can you possibly lose much much more than your initial deposit (margin) unless someone loans you that money in the first place?

And when you buy 100,000 euros with $1,000 down deposit, how come your broker is charging you interest on the 100,000 euros if he is not lending you any money?

And if no one is lending you anything, how come Swiss Franc traders are currently receiving huge bills from their broker? A trader had $5,000 in his account and now it shows a minus 35K balance, so surely someone loaned him at least $30 K and now wants it back badly, no?
Each losing trade is an opportunity to learn
  • #494
  • Edited 9:34pm Mar 8, 2015 9:22pm | Edited 9:34pm
Quoting grin
If by the value date magnitude of rate move is greater than the average (estimated) magnitude on which your deposit was based, you owe the balance.
And the only way to owe money is to borrow it in the first place. A debt cannot exist without a loan.
Each losing trade is an opportunity to learn
  • #495
  • Mar 8, 2015 9:59pm Mar 8, 2015 9:59pm
Quoting grin
{quote} Right. I have already been anticipating the move. Broker has no choice, but cover the shortfall from own funds. That is the moment you incur debt, not earlier. If they are your counter-party, they are sans profit until you repay the balance.
Whatever you say Grin, whatever you say
Each losing trade is an opportunity to learn
  • #496
  • Mar 8, 2015 10:33pm Mar 8, 2015 10:33pm
Quoting replaced
{quote} Once again, still arguing semantics. You're committing the logical fallacy that a word can't mean different things. It can. The word leverage can mean a lot of different things. It could mean the action of a lever. The most important type of leverage as far as loses are concerned is the equity to position ratio. If you have $10k and you buy a lot, that's equivalent to trading a $100k position. It doesn't matter what kind of leverage the broker offers. How much an account loses doesn't matter if the broker allows up to 500 to 1 or 10 to 1...
They could be exactly the same risk a 20 pip stop on the 2 lot position would have the same risk as a 400 pip stop on the .1 lot. I personally never let a trade go 400 pips against me, therefore I can open bigger positions and keep my risk just as low.
  • #497
  • Mar 9, 2015 2:36am Mar 9, 2015 2:36am
Quoting Profit Daily
{quote} They could be exactly the same risk a 20 pip stop on the 2 lot position would have the same risk as a 400 pip stop on the .1 lot. I personally never let a trade go 400 pips against me, therefore I can open bigger positions and keep my risk just as low.
That's not true. a 400 pip stop with .1 lot is less risk and should be higher ROI. The commissions paid will be less on the .1 lot than the 2 lot even though the amount of change in equity is the same. Also big moves over longer timescales can be more predictable. The EUR/USD didn't just move from $1.35 to $1.09 just by chance. However predicting a 20 pip move is pretty much unpredictable/random and almost the same as gambling.
  • #498
  • Mar 9, 2015 4:15am Mar 9, 2015 4:15am
Quoting EarnPipsNow
And when you buy 100,000 euros with $1,000 down deposit, how come your broker is charging you interest on the 100,000 euros if he is not lending you any money?
Wow, ten pages later you are still arguing semantics about leverage.

Now, what about if I bought 1 Lot NZDJPY whit that $1000 deposit in my account, how come the broker is depositing interest into my account? How come I can loan money and even get interest payments doing that?

Quoting EarnPipsNow
And if no one is lending you anything, how come Swiss Franc traders are currently receiving huge bills from their broker? A trader had $5,000 in his account and now it shows a minus 35K balance, so surely someone loaned him at least $30 K and now wants it back badly, no?
Well, perhaps they were trading with to much real leverage if this hurts them?

No one said, that trading with high real leverage has nothing to do with getting a loan.

What about the same example the other way around:
A trader had $5000 in his account, traded about 0.05 EURCHF long. His account shows now still a positive balance. So, he owns nothing as he did not use any real leverage.


Leverage offered from your broker is more like a credit line than a loan. You can use it but you don't have to.
..
  • #499
  • Mar 9, 2015 5:58am Mar 9, 2015 5:58am
what I've seen is two factions saying pretty much the same thing but using different words, its like a philosophy competition

But EarnPipsNow said it first and rightly.

Base of argument: Leverage Kills --- Counter argument: Leverage isn't the responsible factor, RISK is. Counter has been agreed upon by every party including Replaced. (Lets move on guys)

Rather than interpret it any way you guys want to: Simply google the definition of leverage, it IS borrowed money, it IS a loan, how you use it does not change what it is. It isn't EarnPipsNow definition/interpretation it is what IT IS.
  • #500
  • Mar 9, 2015 6:20am Mar 9, 2015 6:20am
Leverage decreases or increases your margin requirements for opening a position. If you have a 100:1 leverage, margin req. for 1 lot of USDJPY would be 1000$..that's it. It is up to you what will you do with your 10k account. To buy or not to buy 10 lots, if you want to utilize full leverage. If you buy 0.1 lot, margin requirement is 100$.

On another side: 1 Lot equals 100 000$; That's the amount for 1 USDJPY contract with no leverage whatsoever.. If your want to trade with no leverage you can call your broker and tell him to reduce your leverage to whatever amount you want. 1:1, no problem, now you need 100 000$ to cover margin for 1 lot. It's the same as in futures.

Leverage is not a bad thing as it frees up your capital, so you can use it as you see fit. So many people lose money because they never bothered to learn to trade, instead they buy tons of EAs, follow people, etc. Not one of those 80,90% who loses money spent more that couple of hours in front of the platform observing price, and manually trading. They all are carried away by beliefs that they will become rich overnight, they just have to buy this EA for 99$ or that course for 499$ and they will be millionaires.
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