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

  • #601
  • Mar 14, 2015 11:09pm Mar 14, 2015 11:09pm
This is the same as those who believe that there is great risk and stress in trading lower time frames. There are those who trade 1 min time frames [as well as renko charts] and of course there are those who swing trade , trade frome weekly charts, monthly etc.

I trade from renko charts and I NEVER carry a position in futures trading or forex trading.

yes I use a small stop loss it does not cost me much money to find out that I am wrong.

My point is there are a lot of things that effect risk - not just leverage.
It does still amaze me that newbe traders think they can trade and make large sum of moneys. Like was said before would you go to a brain surgeon who had just graduated from med school. of course not, that is why brain surgeons have to do years of internship.

So on a forum like FF are all of the members newbes or there members who are success full traders.

So yes a trader without much experience should not be using high leverage or a new trader should not have pie in the sky expections. Also the new trader MUST be able to afford to lose his entire account without it affecting their lifestyle.
All trends begin with the smallest time frame
  • #602
  • Edited 11:37pm Mar 14, 2015 11:15pm | Edited 11:37pm
Quoting grin
You are actually never out of money as you must get your $10K back the very same day.
There is only one little problem with your "logic": your bank must see that 10K down payment first before granting you the $100,000 loan - $90,000 actually - so you can buy the house and resell it for a profit (assuming you can find a buyer the same day, of course, in this example).

But the main question still remains on the table and you still have not answered it yet (even though you are under no obligation to do so): You buy a 100K house with 10K down payment. A week later (if selling on the same day bothers you) you sell it for 120K.

What is your leverage and your return on investment?

See, very, VERY simple question.

Quoting grin
Am I confusing you?
Confused no, just (mildly) amused.
Each losing trade is an opportunity to learn
  • #603
  • Mar 14, 2015 11:33pm Mar 14, 2015 11:33pm
Quoting EarnPipsNow
{quote} Shellsnail, you buy a $100,000 house with a $10,000 down payment. Then you resell it the same day for $120,000. What is your leverage and your return on investment (forget about the interest rate for the moment)?
Suppose 10,000 was all you had then your leverage was 1:10 when you bought the house. Return on investment is 200% (was 20% but amplified by leverage 10 times)

I don't see what's the point of this question though.
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  • #604
  • Mar 14, 2015 11:46pm Mar 14, 2015 11:46pm
Quoting shellsnail
Suppose 10,000 was all you had then your leverage was 1:10 when you bought the house. Return on investment is 200% (was 20% but amplified by leverage 10 times)
Superb! That was of course the exact answer. You buy a 100K house with 10K down payment, you sell it for 120k say 1 week later, so your leverage is 10:1 (100,000 divided by 10,000) and your return on investment is 200% in one week. You used the bank's money to earn a profit.

Excellent.

Ok, now here is another question.

You buy 100K of euros (1 standard lot) with $1K down payment (margin money). You resell your euros a week later for $120K (again assume zero interest).
Same question : what is your leverage and your return on investment?
Each losing trade is an opportunity to learn
  • #605
  • Mar 15, 2015 12:09am Mar 15, 2015 12:09am
Quoting EarnPipsNow
{quote} There is only one little problem with your "logic": your bank must see that 10K down payment first before granting you the $100,000 loan - $90,000 actually - so you can buy the house and resell it for a profit (assuming you can find a buyer the same day, of course, in this example). But the main question still remains on the table and you still have not answered it yet (even though you are under no obligation to do so): You buy a 100K house with 10K down payment. A week later (if selling on the same day bothers you) you sell it for 120K....
I had no plans of doing math for you. Answer is obvious. The question was not addressed to me anyway.

You can buy a house without financing being in line. It is only a contract, but you give seller $10K deposit. It is toward payment on the house, but until then it is a performance bond. As long as you know that you do not have to take delivery of the house, you need no money. Then you will have options: flipping at profit, break even, loss, or somewhere in between. I would treat abandonment of the purchase as flip for loss, as the house goes back to its current owner.

If you found a buyer to resell with closing not exactly on the same date as for you, you can get bridge financing. It is not very complicated to get, but it will cut into your profit. If you cannot find buyer on the same date, you will likely need $10K as the bond must be still posted. Should you require the bridge, the deposit you collect can also serve as down payment.
  • #606
  • Edited 12:36am Mar 15, 2015 12:10am | Edited 12:36am
Quoting EarnPipsNow
{quote} Superb! That was of course the exact answer. You buy a 100K house with 10K down payment, you sell it for 120k say 1 week later, so your leverage is 10:1 (100,000 divided by 10,000) and your return on investment is 200% in one week. You used the bank's money to earn a profit. Excellent. Ok, now here is another question. You buy 100K of euros (1 standard lot) with $1K down payment (margin money). You resell your euros a week later for $120K (again assume zero interest). Same question : what is your leverage and your return on investment?
If 1000 was all you had, then 1:100.

If it's 120k, original asset appreciated 20%, you made 2000% return. As the asset appreciates, your leverage decreases because your equity rises. For instance, at 10% appreciation, you would have made 1000% return. At which point your leverage drops to 1:10.

On the other hand, if the asset had depreciated 1%, you would have lost all your money.

That said, if you had 10k in the bank you were prepared to risk i.e. top up your account when things gone wrong, then your true leverage is 1:10.

Still don't see the point of the question.

***

The argument OP is making is simple. I'll make it simpler; try and follow.

1. Employing high leverage means that you need very tight stop-losses to control your % risk.
2. Spreads and commissions represent a large % of SL.
3. Assuming like most traders your RR is something like 1:2, it means trading costs are going to eat up a large proportion of your profits. (i.e. if using a 10 pip stop with 10 pip target gives you 55% edge, that edge disappears with a 1 pip spread.)
4. Given that most trading edges are small to begin with, this severely disadvantages traders using high leverage.
5. Therefore, high leverage leads to lower profitability.
(6. Moreover, you are forced to trade just lower spread pairs. Again, your risk is amplified because these tend to be denominated in USD and are therefore highly correlated with one another.)

Another line of agument.

1. You do not employ proper stop-loss or use large stop-losses.
2. High leverage will mean that a small fluctuation is enough to wipe out a substantial portion of your risk capital.
3. A 1% decline in EUR/USD i.e. 100pips, will mean a 100% loss if you are using 1:100 leverage.
4. Given that the average volatility for currency is about 1% daily, you have about a 50% chance of losing everything on a daily basis if you employ high leverage without stop-losses.
5. For the case with large stop-losses, high leverage means you are risking high % account of each trade.
6. By risk of ruin formula, you are likely to go broke over a series of losing trades.
7. Given that the formula is based on trades being independent of each other, your actual chance of going broke is probably higher than calculated since you are using the same strategy in a similar environment and each trade's outcome tends to be correlated with the next.
8. Therefore, high leverage leads to lower profitability.

Combining both line of arguments, we see that employing high leverage leads to lower profitability in ALL cases.
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  • #607
  • Mar 15, 2015 12:24am Mar 15, 2015 12:24am
Quoting shellsnail
{quote} If 1000 was all you had, then 1:100. If it's 120k, original asset appreciated 20%, you made 2000% return. As the asset appreciates, your leverage decreases because your equity rises. For instance, at 10% appreciation, you would have made 1000% return. At which point your leverage drops to 1:10. On the other hand, if the asset had depreciated 1%, you would have lost all your money. That said, if you had 10k in the bank you were prepared to risk i.e. top up your account when things gone wrong, then your true leverage is 1:10. Still don't see...
Ok, I see that we are getting nowhere fast.

So if I enter a casino with $1,000 and I lose it all you will tell me that I lost 100% of my gambling capital.

But if I tell you that I have 1 million dollars upstairs (in my suite) in my briefcase in that same casino now my loss is only 1%, is that it?
Each losing trade is an opportunity to learn
  • #608
  • Mar 15, 2015 12:25am Mar 15, 2015 12:25am
Quoting EarnPipsNow
{quote} Ok, I see that we are getting nowhere fast. So if I enter a casino with $1,000 and I lose it all you will tell me that I lost 100% of my gambling capital. But if I tell you that I have 1 million dollars upstairs (in my suite) in my briefcase in that same casino now my loss is only 1%, is that it?
Yup. That's it. And really this is not the point of the argument OP is making; it's just definition. I've edited my prev post, go see.
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  • #609
  • Mar 15, 2015 12:38am Mar 15, 2015 12:38am
Quoting shellsnail
Yup. That's it
No wonder why so many traders traders still believe that leverage has anything to do with capital.

Next time you lose your wallet with $1,000 in it Shellsnail, don't consider it as a total $1,000 loss but just a mere 1% loss, because you are making a $100,000 a year salary.

Quoting shellsnail
. And really this is not the point of the argument OP is making
Really?

Read OP comments : "The next factor is leverage..."

And that's precisely what we are talking about, nothing more. But since most traders (you included) keep thinking that leverage depends on trading capital, there is no point in continuing this debate any longer.
Each losing trade is an opportunity to learn
  • #610
  • Mar 15, 2015 12:41am Mar 15, 2015 12:41am
Quoting EarnPipsNow
{quote} No wonder why so many traders traders still believe that leverage has anything to do with capital. Next time you lose your wallet with $1,000 in it Shellsnail, don't consider it as a $1,000 loss but just a mere 1% loss, because you are making a $100,000 a year salary. {quote} Really? Read OP comments : "The next factor is leverage..." And that's precisely what we are talking about, nothing more. But since most traders (you included) keep thinking that leverage depends on trading capital, there is no point in continuing this...
Yup of course there's no point because that's how the finance industry sees leverage. So if you want to define it some way else, suit yourself.

Regardless of how it's defined, OP's argument makes sense as I have shown above.

Just to be clear, it's not about how much leverage your broker offers, but how much leverage you are actually using that matters.
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  • #611
  • Mar 15, 2015 12:46am Mar 15, 2015 12:46am
[quote=shellsnail;8137710]{quote} Yup of course there's no point because that's how the finance industry sees leverage. So if you want to define it some way else, suit yourself. Regardless of how it's defined, OP's argument makes sense as I have shown above. Just to be clear, it's not about how much leverage your broker offers, but how much leverage you are actually using that matters.[/quote]
You are using how much leverage your broker offers every time you place a trade. Leverage= Position size/ used margin. Do the calculation every time you place a trade. It never changes.
  • #612
  • Mar 15, 2015 12:56am Mar 15, 2015 12:56am
Quoting EarnPipsNow
{quote} No wonder why so many traders traders still believe that leverage has anything to do with capital. Next time you lose your wallet with $1,000 in it Shellsnail, don't consider it as a total $1,000 loss but just a mere 1% loss, because you are making a $100,000 a year salary. {quote} Really? Read OP comments : "The next factor is leverage..." And that's precisely what we are talking about, nothing more. But since most traders (you included) keep thinking that leverage depends on trading capital, there is no point in continuing this debate...
100% loss of account equity. 1% decrease in income for the year. What is the problem?
  • #613
  • Edited 1:15am Mar 15, 2015 12:57am | Edited 1:15am
Quoting shellsnail
Yup of course there's no point because that's how the finance industry sees leverage.
Really?

Here is how the finance industry defines the word leverage exactly, whether you like it or not:
http://www.investopedia.com/articles...w-it-works.asp
(From the article : " Leverage is an investment strategy of using borrowed money to generate outsized investment returns")


Here the money you borrow when you open a Forex position simply comes from your broker, of course.

Please feel free to contact investopedia and make sure to tell them that they are just a bunch of morons and that leverage is something else. I am sure they would quickly apologize and let you rewrite the entire article with YOUR own definition of leverage.
Each losing trade is an opportunity to learn
  • #614
  • Mar 15, 2015 1:08am Mar 15, 2015 1:08am
Quoting EarnPipsNow
{quote} Here is how the finance industry defines the word leverage exactly, whether you like it or not: http://www.investopedia.com/articles...w-it-works.asp (From the article : " Leverage is an investment strategy of using borrowed money to generate outsized investment returns) Please feel free to contact investopedia and make sure to tell them that they are just a bunch of morons and that leverage is something else.
That would be correct for equities when you take delivery of a stock, i.e. hold it overnight at minimum.

For day trading margin is lower as your trades require no delivery with corresponding borrowing. Brokers require only performance bond to be posted.
  • #615
  • Edited 2:23am Mar 15, 2015 1:29am | Edited 2:23am
leverage is good and bad. double edge sword as fti puts it. depends on how you use it.
broker offers 100:1 = for every $100 u trade, you only need $1 as margin.
now if i only deposit $1 and trade $100, what are the implications?

advantage
i can get high returns with high leverage
i can use the rest of my cash savings to buy other things instead of having them locked up with my broker

disadvantage
a 1% move will margin stop me out. so for some people, in order for their strategy to work, they need to be able to
tolerate more than 1% of volitity. so trading $100 with a $1 deposit is not effective for them. they get margin stop even before they can fully employ their strategy
for e.g. the SNB saga. currency moved 40% in an hour. if you are trading $2.50 with a $1 deposit. you would have been margin stopped.

so leverage is good and bad depending on your strategy. the key is to use the right amount based on your strategy

Understanding the difference between margin requirement, max leverage and effective leverage.
same broker 100:1. if i deposit $1 but i trade only $50. margin used = $0.50, max leverage = 100X, effective leverage = 50X, % currency move agst my position to margin stop = 2%
implications? i can still add to my position because i still have $0.50 of free margin (assuming price haven't moved). but as i add to my position, my effective leverage increase and my tolerance to currency move agst my position reduces

so is it true that many people lose money in forex due to leverage? well.. it is true for those who underestimate the voility of the currency pair that they are trading. it is not true for those who knows what they are doing.
  • #616
  • Mar 15, 2015 8:26am Mar 15, 2015 8:26am
Quoting EarnPipsNow
{quote} Really? Here is how the finance industry defines the word leverage exactly, whether you like it or not: http://www.investopedia.com/articles...w-it-works.asp (From the article : " Leverage is an investment strategy of using borrowed money to generate outsized investment returns") Here the money you borrow when you open a Forex position simply comes from your broker, of course. Please feel free to contact investopedia and make sure to tell them that they are just a bunch of morons and that...
If this thread were split into 2 teams, I'd be on yours. I am concerned that the other team is winning converts to their side, because they seem so confident in their position while being so wrong. Here is where I would start with an explanation of leverage. You deposit $10,000 in your margin account (forget how much money you have elsewhere). Assume you limit your capital exposure to 2% per trade, or $200. Along comes a trade opportunity that fits your market structure analysis, meets your capital exposure rule of no more than 2% (for me, this is normally 20-25 pips), and presents an opportunity of 60 pips. If your broker offers 50:1 leverage, they will set aside $2000 of your margin account for your trade of 1 standard lot, leaving you with $8,000 in usable margin. On the other hand, had your broker offered 100:1 leverage, they would set aside $1,000 of your margin account for your 1 standard lot trade, leaving $9,000 in usable margin. In both cases, if your trade goes against you, you lose $200 because that is where you set your stop on both trades. In both cases, if you have the balls to wait for the trade to hit your target, you will make $600. Leverage plays no roll in whether or not the trade goes -20 or +60. Leverage played no roll in where you placed your stop, and it played no roll in where your target is located. It is your trading strategy, and your ability to execute your strategy, that determines where you end up in this trade.

Now, if someone believe the market is random, views every trade is a 50/50 bet, can't connect their market analysis with success in trading, or has developed a fear of trading, then of course leverage, and commissions, and volatility are the things standing in the way of success. At least they think these are the reasons. So let me ask the members of the other team: if there were no commissions, no spreads, no volatility, and 1:1 leverage, would you make money in the forex? I think the answer, at best, is this would increase your chances of breaking even, but nothing more. And in the final analysis, doesn't that point to your real problem?
  • #617
  • Mar 15, 2015 8:34am Mar 15, 2015 8:34am
Leverage = loan... name it whatever what you want (performance bond ) it is still a loan.

Consider actual bonds, bonds are loans by investors to the government, or corporations. The bonds markets have another name, the debt market = loans.

Threads like this make me realise that the average person trading forex really shouldn't be, because many don't know what they are getting themselves into.
  • #618
  • Mar 16, 2015 3:04pm Mar 16, 2015 3:04pm
Quoting verv
Leverage = loan... name it whatever what you want (performance bond ) it is still a loan. Consider actual bonds, bonds are loans by investors to the government, or corporations. The bonds markets have another name, the debt market = loans. Threads like this make me realise that the average person trading forex really shouldn't be, because many don't know what they are getting themselves into.
Then you disqualified yourself.

Dealing with something which might require a loan does not mean that the loan was taken out. When you manage to offset all your transactions before settlement date, you merely collect profit or pay out loss on the date as net proceeds from all of the transactions.

The amount of funds put into an account must support specific trading strategy. Brokers' leverage requirements are immaterial, but they are likely sized to permit reasonable breathing space for trades and risk management in most circumstances.
  • #619
  • Mar 16, 2015 5:52pm Mar 16, 2015 5:52pm
Quoting grin
{quote} Then you disqualified yourself. Dealing with something which might require a loan does not mean that the loan was taken out. When you manage to offset all your transactions before settlement date, you merely collect profit or pay out loss on the date as net proceeds from all of the transactions. The amount of funds put into an account must support specific trading strategy. Brokers' leverage requirements are immaterial, but they are likely sized to permit reasonable breathing space for trades and risk management in most circumstances....
EarningPipsNow has already went over why that is wrong lol.
  • #620
  • Mar 16, 2015 5:55pm Mar 16, 2015 5:55pm
Quoting grin
Dealing with something which might require a loan does not mean that the loan was taken out.
Nonsense.

A loan is legally and financially created each time you trade on margin.

Quoting grin
When you manage to offset all your transactions before settlement date, you merely collect profit or pay out loss on the date as net proceeds from all of the transactions.
True, at least technically.

But what you conveniently "forgot" to mention is that the loss could be quite, quite substantial and in some cases even exceed your trading capital 10 or 50 times over (think SNB massacre, for instance).
Each losing trade is an opportunity to learn
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