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Isn't 2% per trade massively flawed?

  • #61
  • Mar 31, 2015 6:30am Mar 31, 2015 6:30am
Quoting nasir.khan
{quote}
Just go with ones that do offer protection against neg balance.
and honestly SNB was not a black swan event. A terrorist attack or an earth quake is a black swan event and those slip you like 200-300 pips at most.

You had ECB constantly pushing the euro down and announcing more QE in next week, you knew the schedules speech timing of SNB, you knew that shorting chf was never worth it interms of Risk:reward ratio.

if anyone was long any chf pairs at that time and think they had a black swan... they had it coming. Though i will make the...
Very interesting post thank you.

Just a few thoughts:

 

  1. The issue I have with Neg balance protection are companies always manage to fit in somewhere in the smallest of print, and cleverest of ways, that gets them out of tricky situations... I mean realistically, how can they protect against ALL negative balances? Imagine if I traded 100 lots, I'd probabily put them out of business single handedly, surely that's a risk they are NOT willing to take realistically
  2. I only know afterwards that trading EURCHF was a bad idea, so where would one find information out about which pairs you should be avoiding? (People say news but I don't know what's to listen to and what's not.
  3. 200-300 pips I can understand how it would happen but surly if you cannot withstand a 200 pip loss it's a stupidly silly trading in the first place..

  • #62
  • Mar 31, 2015 6:38am Mar 31, 2015 6:38am
I completely understand and accept taking risks. I completely understand risking your account to gain unlimited returns.

What I don't understand or agree with is risking MORE than my account. How can I expect to deposit $10000, and then risk my families home, jobs, futures to make returns.

I understand the idea of depositing a fraction and using negative balance accounts, but the issue here is you are putting all your faith in the broker to stand by this... putting your and your families future in the hands of the broker again seems a bit silly. (FXCM for example bailed..)

It all seems to boil down to the statement raised by Chicky..

One million dollar question is what to do in such a situation? If we try to play safe, return gets ridiculously small. If we trade for decent profit, either risk becomes obnoxiously high or chances of success become minimal.

So... we either:

1. risky everything we own in the hope of being part of the 5% that makes a profit?
2. Trade but only risking tiny amounts making it almost pointless?
3. Don't trade?

Is this what it comes down to?

What am I missing? what DO we do as traders?
  • #63
  • Mar 31, 2015 6:51am Mar 31, 2015 6:51am
Quoting flinx
I completely understand and accept taking risks. I completely understand risking your account to gain unlimited returns. What I don't understand or agree with is risking MORE than my account. How can I expect to deposit $10000, and then risk my families home, jobs, futures to make returns. I understand the idea of depositing a fraction and using negative balance accounts, but the issue here is you are putting all your faith in the broker to stand by this... putting your and your families future in the hands of the broker again seems a bit silly....
It's really quite simple,

Trade demo until you have a proven edge, and by proven edge I mean demo trading for months and consistently making money. So many people are trading live yet have never traded profitably on demo and it baffles me.

IF and when you reach the profitable stage (very few will so they should forever be trading demo, regardless of what they claim) then there isn't an issue risking 1-5% of your balance as you should know your profitability and that your edge will carry you through a losing streak.
All the best,
  • #64
  • Edited 7:42am Mar 31, 2015 7:00am | Edited 7:42am
Quoting flinx
I have found a trading strategy that gives me the edge and am confident it will do in years to come.
That's great flinx.

Quoting flinx
So it seems you only risk 0.5% however trade a large amount of pairs which increases the returns overal? Is that correct?
That's it in a nutshell.


Quoting flinx
If so, isn't that just trying to solve the problem highlighted by Chicky? "One million dollar question is what to do in such a situation? If we try to play safe, return gets ridiculously small. If we trade for decent profit, either risk becomes obnoxiously high or chances of success become minimal." Eg, just trying to increase the amount of pips recieved increases the returns when trading at such little volume. Which is obviously not a logical approach as yes, you are making the same, but you are having to make a lot more pips?
Chicky is no slouch and he is totally correct. There is inevitably a trade-off between risk and return. In achieving my results, they have been configured to provide sufficient realistic income to trade for a living, but with that came a trade-off of reducing profit potential to reduce associated drawdowns. Where the problem arises however is in what traders term 'suffficient capital' and 'realistic and sustainable returns' and unfortunately most get it dead wrong or may get it right just as long as market conditions don't change....or may just have a lucky stretch.

The result is that frequently right from the outset or within a short space of time, the trader is put in the undesirable position of having to over-trade or take excessive risks to meet their overly ambitious targets whether by simply getting it wrong from the outset, or when conditions simply change. While they may actually have a strategy with an edge (which is actually a pretty rare thing and I daresay that many confuse luck with expectancy bias or an edge with a particular set of market conditions), the unrealistic expectations often unnecessarily stretch things too far beyond what is realistically achievable and hence meet the inevitable end in retail trader heaven. I also would hate to think how many good strategies have bit the dust simply because traders and their unrealistic expectations think the strategy is no longer valid following a string of losses which inevitably occurs with every strategy, even the best ones. There is so much utter BS in this retail world, it is easy to see why this level of unrealistic expectation is created.

The important thing to recognise as a trader is that every one of us have different risk-return profiles and what works for some does not work for others hence the need to 'own your approach'. Trend trading with diversification works for me in that this technique creates a sufficient return for my needs but more importantly significantly reduces my risk exposure and minimises potential drawdowns for those inevitable bad patches that will come even for the best professionals out there with audited verifiable results. For others, it would not offer the necessary excitement and lure of 'riches' to keep them committed to the necessary hard work involved. Each to their own, I suppose :-)
  • #65
  • Mar 31, 2015 7:02am Mar 31, 2015 7:02am
Quoting BeTrue
{quote} then there isn't an issue risking 1-5% of your balance as you should know your profitability and that your edge will carry you through a losing streak. All the best,
I think you have missed the point. Risking 1-5% is all well and good when winning and losing into drawdown, but if you got caught by a 1000 pip move you'd have debt you could never pay off on your shoulders... sadly like a few I've seen on this Forum.
  • #66
  • Mar 31, 2015 7:15am Mar 31, 2015 7:15am
Quoting flinx
So... we either: 1. risky everything we own in the hope of being part of the 5% that makes a profit? 2. Trade but only risking tiny amounts making it almost pointless? 3. Don't trade? Is this what it comes down to? What am I missing? what DO we do as traders?
It is not necessarily limited to these options.

For example, keep a primary income source as you progressively scale into trading for a living but after going through the necessary routine of back-testing, forward testing, demo and then micro accounts and so on and so forth. Never leave that primary income source until you can look your wife and kids (or any dependant) in the eye and confidently state you have their interests at heart. Just don't let the old ego or any gambling addiction get in the way of realism and be very careful that all your assumptions are validated statistically before moving on. Treat trading as a career path where you commence as an apprentice and after years of your own hard work hopefully become successful in your trade of choice.
  • #67
  • Mar 31, 2015 8:32am Mar 31, 2015 8:32am
This is an excellent thread, definitely one I will be adding to my favourites. The original poster raises issues that continue to haunt me to this day, regarding risk, the SNB event and the potential to go into negative equity; and asks questions that any new trader should be asking if they are considering getting into this business.

Personally, I think some of the best tactics to employ regarding mitigating risk are to trade very liquid instruments, choose a broker who offers negative balance protection (meaning they specifically state this in their T&C's, not just mention it on the home page of their website) and set up a discretionary trust fund as soon as it becomes a financially viable option.
  • #68
  • Mar 31, 2015 11:48am Mar 31, 2015 11:48am
Quoting flinx
{quote} I think you have missed the point. Risking 1-5% is all well and good when winning and losing into drawdown, but if you got caught by a 1000 pip move you'd have debt you could never pay off on your shoulders... sadly like a few I've seen on this Forum.

I guess if you are overly worried by that situation you should do two things that completely resolve your problem;

 

  1. Find a broker that has negative balance protection (there are a few out there)
  2. If you normally risk £100 a trade, deposit only the required capital needed for one trade. It would require topping up now and then if you lose a few but as deposits are free then there isn't an issue. Therefore if all of your account is lost there isn't an issue.

As a result of what happened I have actually switched to a broker that has negative balance protection, and I have decreased my trading capital as I only ever put 1 trade on at a time.

Apologies for not understanding your point, your question is valid.

All the best,

  • #69
  • Mar 31, 2015 12:05pm Mar 31, 2015 12:05pm
Quoting Richy1985
Personally, I think some of the best tactics to employ regarding mitigating risk are to trade very liquid instruments, choose a broker who offers negative balance protection (meaning they specifically state this in their T&C's, not just mention it on the home page of their website) and set up a discretionary trust fund as soon as it becomes a financially viable option.




​I agree with all your suggestions. I think it's noteworthy though to not completely rely on negative balance protection.. FXCM offered negative balance protection up until they were suffering and then tried to collect it. Might even be worth asking a specialist to look over your broker terms to make sure they don't have anything secret hiding away..

I think (for me anyway) It's going to be vitally important to not over leverage myself... I am not confident trading 2% of my account per trade as this is far too much in my opinion (incase of slippage issues) and the risk simply isn't worth it. something along the lines of £2000 per £1 traded... then worst comes to worst I still have the emergency funds ready incase I encounter debt somehow.

One of my main concerns now is all those people who are not aware of things like this and could be playing with a ticking time bomb risking far too much. I read a horror story on here of a University student with -500k debt at FXCM (apparently offered negative balance protection too) and they are now wanting it. I really hope the best for them and everyone else in unhappy situations.

Any other thoughts how we can minimise our risk would be very welcome...
  • #70
  • Mar 31, 2015 12:07pm Mar 31, 2015 12:07pm
Quoting BeTrue
{quote} I guess if you are overly worried by that situation you should do two things that completely resolve your problem; Find a broker that has negative balance protection (there are a few out there) If you normally risk 100 a trade, deposit only the required capital needed for one trade. It would require topping up now and then if you lose a few but as deposits are free then there isn't an issue. Therefore if all of your account is lost there isn't an issue. As a result of what happened I have actually switched to a broker that has negative balance...
Thank you for getting in touch. Your approach is something I will be doing when I start trading live capital. As mentioned above though (Post 69) I would highly recommend other funds just incase... or at least making sure the negative balance protection is 100%, last thing you want is to rely on it and the night before they change policies.
  • #71
  • Mar 31, 2015 12:21pm Mar 31, 2015 12:21pm
Quoting flinx
{quote} Very interesting post thank you. Just a few thoughts: The issue I have with Neg balance protection are companies always manage to fit in somewhere in the smallest of print, and cleverest of ways, that gets them out of tricky situations... I mean realistically, how can they protect against ALL negative balances? Imagine if I traded 100 lots, I'd probabily put them out of business single handedly, surely that's a risk they are NOT willing to take realistically I only know afterwards that trading EURCHF was a bad idea, so where would one find...
Regarding your first point, email them and ask them very clearly what will happen in such a situation. Save the email correspondence for later if there is an issue.

Well to start with avoid trading 5-10mins before and after any Red labeled news. Do NOT trade when a central banker or any important politician is making a speech or even Q&A (those are always listed to on FF).

Invest some $20 (per month) in a audio service like Ransqawk or Talking forex, they not only are the fastest available to retail traders to let you any thing about markets but they will also keep reminding you about any off new events like wars/elections/polls etc.
  • #72
  • Mar 31, 2015 12:38pm Mar 31, 2015 12:38pm
I have been trading for 5-6 years now and i trade NFP, ECB, FOMC all the time but only time i was slipped was on a Audusd short a few months ago when PBOC cut the RRR. I think my 250 SL was closed at 40 pips.

The reason is i dont get into a situation where i cant measure all the possibilities and always try to walk into situation where i wont get caught off-guard. So if any trader does his due diligence he should be fine. I did not trade and CHF pair after the floor was put in, it was not worth it and i coudl not be bothered when there 5-10 other decent pairs to trade.

Another thing, there are always new traders coming into market everyday and we cant expect everyone of them to understand the risks involved straight away without burning first.

So i think its brokers responsibility to manage the correlated and event risk, they should have risk management depts working on this and limiting activity in certain paris at certain times.
  • #73
  • Mar 31, 2015 1:10pm Mar 31, 2015 1:10pm
Quoting nasir.khan
{quote} Regarding your first point, email them and ask them very clearly what will happen in such a situation. Save the email correspondence for later if there is an issue. Well to start with avoid trading 5-10mins before and after any Red labeled news. Do NOT trade when a central banker or any important politician is making a speech or even Q&A (those are always listed to on FF). Invest some $20 (per month) in a audio service like Ransqawk or Talking forex, they not only are the fastest available to retail traders to let you any thing about markets...
Thanks, very helpful points. The email is something I will note down and make sure I do.
You mention not trading red news events, I may be wrong, but isn't ECP, NFP red news events?
Additionally, how can one avoid red news events on longer term trades? Surely it would result in closing out positions all the time?

A Audio service does look like a good investment, however the problem I would have is I don't have much 'market' knowledge, so wouldn't understand the terminology and wouldn't know what to listen to and what to not listen to..I feel i'd get confused.

You mentioned you didn't trade CHF and knew it was bad. I didn't know about anything like this until it was too late. Do you have any material/websites for teaching how to learn about things like this?

Thanks and hope to hear soon,
  • #74
  • Mar 31, 2015 1:32pm Mar 31, 2015 1:32pm
Quoting flinx
{quote} I think it's noteworthy though to not completely rely on negative balance protection.. FXCM offered negative balance protection up until they were suffering and then tried to collect it. Might even be worth asking a specialist to look over your broker terms to make sure they don't have anything secret hiding away
I agree. Yes, like you I am very concerned that FXCM offered negative balance protection and then went back on their word. I would also seek legal advice from a lawyer, and ask them where I would stand if I happened to get into debt, and the broker said they were going to enforce the debt despite assuring customers that they were protected against instances of negative equity. I would ask them if they could bankrupt me under these conditions, whether or not vital assets such as property could be seized (even if they were not made out in my name) and whether the Force Majeure clause could be used as a means of getting out of negative equity protection guarantees.

Everyone's situation is different so I think legal advice is essential.

If I decide to continue trading Foreign Exchange, I shall open a trust fund as soon as I can afford to. Like you, I don't really trust their negative balance protection claims and they do indeed seem to find ways of wriggling out of their side of the deal, as was the case with FXCM.
  • #75
  • Mar 31, 2015 1:43pm Mar 31, 2015 1:43pm
Quoting Richy1985
{quote}Like you, I don't really trust their negative balance protection claims and they do indeed seem to find ways of wriggling out of their side of the deal, as was the case with FXCM.

I wonder how things work if you set up as a Limited Liability company, perhaps that would also help with some form of debt relief should that happen. Don't have any ideas about it however I'm just suggesting potential ideas.

So far, the best ideas I've gathered from this thread:

 

  1. Control Leverage, don't over exposure yourself (£2000 per £1 traded seems about right, obviously the more the better - then if you do get caught, worst case scenario, you would be much better prepared)
  2. Trade using only Negative Balance Protection Accounts
  3. Only Deposit a fraction of your account into the broker account
  4. Avoid trading Red news events
  5. Avoid pegged currencies (as CHF was)

  • #76
  • Edited 7:49pm Mar 31, 2015 3:58pm | Edited 7:49pm
Points 1,4 and 5 are valid but points 2 and 3 simply transfer risk to your broker and inevitably it is us that pay for this risk transfer down the track with regulatory intervention, greater barriers to entry or simply higher spreads. These 2 points highight how the debacle following the sub-prime collapse occurred. "Stuff my obligations....here are the keys approach". They do not address the problem. They simply transfer the problem to others. As successful traders we need to understand risk and manage risk ourselves.

Also remember that negative balance protection may protect you from Black Swan events where the liability may be attributed to an intermediary such as a liquidity provider or a broker, but it won't necessarily protect you from negative equity arising from personal recklessness/ negligence and simple error which is a far greater problem for retail traders than the sporadic 'black swan' outlier. It is far better to rely on prudent risk management measures to stay in the game a long time. A margin call is a fact of life for a trader who uses leverage so know how to manage it.
  • #77
  • Mar 31, 2015 4:15pm Mar 31, 2015 4:15pm
Quoting flinx
{quote} Very interesting post thank you. Just a few thoughts: The issue I have with Neg balance protection are companies always manage to fit in somewhere in the smallest of print, and cleverest of ways, that gets them out of tricky situations... I mean realistically, how can they protect against ALL negative balances? Imagine if I traded 100 lots, I'd probabily put them out of business single handedly, surely that's a risk they are NOT willing to take realistically I only know afterwards that trading EURCHF was a bad idea, so where would one find...
Actually listening to the news from different sources would help. There were rumors that the SNB would remove the cap and it was circulated, anyone who listened would avoid trading the pair back then as I did. I avoid risky situations and sometimes I avoid neg beta pairs like USDJPY. There are many other fish in the ponds for all of us.

As for QE, this horse was beaten to death till it eventually happened and with twice the amount (1T instead of 500B) which pressured the EURUSD downward more, with the Grexit and Ukraine, that was all expected. So listen, all u need to do is listen, EURUSD parity soon and the FEDs will have to hike, unlike some who say not really, they will hike, u'll see.
As for trading 100 lots, how would your broker allow u to do that when the margin requirements are strict ?

GL
  • #78
  • Mar 31, 2015 4:38pm Mar 31, 2015 4:38pm
Personally I find 2% too low. I feel like @ 2% I may aswell be trading stocks with 2:1 margin. Additionally I'm not a fan of recalculating the X% each time I make a trade based on my current balance. In the case of loss on balance my lot size will be smaller making it harder to make back my loses and acheive profit. In the case of increasing balance by not adjusting I am building up a cushion to protect my capital and profit as the year progresses.
  • #79
  • Edited 2:13pm Apr 8, 2015 12:23pm | Edited 2:13pm
I'm not sure how I got onto this thread, given that I find the FF forum side of things incredibly boring and useless....ah, that's right someone from here sent me a PM and I checked their profile.

Your question is a useful one, but also not difficult to answer. DO NOT TRADE EXOTICS.

Following your own line of thought, you are correct - a 2% account risk is STUPID, because you'll never get rich from it. Yet if you trade exotics then you can get very poor indeed.

I trade at 400:1 leverage. I trade at that leverage at 2.5 lots per $1,000 in my account. I use brokers which DO charge for negative balances. These same brokers also allow hedging, and I hedge at -11 pips, before transaction costs. If I screw the pooch on a trade, I am down less 30%, BUT because my system of trade entries is VERY accurate, getting out of a hedge to me is just the next trade entry.

That said, these ways I trade do NOT talk to your question. I'm up $88,000,000 so it is easy for me to talk.

I recommend that you trade large lots per your account size. HEDGE, do NOT use stop losses.

BUT MOSTLY, ONLY TRADE THE Eur:USD. The EU is THE most liquid pair around. It can gap on Monday openings, but WTF are you in a trade for at an opening? News can skew prices out of the stratosphere, but why are you trading news without an edge? Etc etc etc.

NEVER be in a trade OR hedged over a weekend. NEVER be hedged going into a major news event such as NFP or FOMC.

Trading other pairs is asking to be raped.

Quoting flinx
I completely understand and accept taking risks. I completely understand risking your account to gain unlimited returns. What I don't understand or agree with is risking MORE than my account. How can I expect to deposit $10000, and then risk my families home, jobs, futures to make returns. I understand the idea of depositing a fraction and using negative balance accounts, but the issue here is you are putting all your faith in the broker to stand by this... putting your and your families future in the hands of the broker again seems a bit silly....
  • #80
  • Apr 8, 2015 1:44pm Apr 8, 2015 1:44pm
There is always the possibility that you will be on the right side of a "black swan" event and profit handsomely.
Price movement is not random!!
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