Money management and leverage

I couldn't post in Money management thread, unfortunately it's closed. So I had to open a new one.

I'll be very grateful if someone could make thing clear to me.

I have $5000 demo account with 200:1 leverage. Question is: what size lot I can trade if I want to risk 2%?

2% of my deposit is $100.00
If I want to set a stop 20 pips = $100/20=$5 pip Right?

And then I got lost. What do I do next? Does it mean that I can trade half of a normal lot? Normal lot is 100.000, so I can trade 50.000 lot?
How to apply 200:1 leverage to this calculation?

Thank you very much for help

It depends on the currency pair you are trading. For GBP/USD and EUR/USD yes, you can trade 50,000 because for these pairs 1 lot = $10 per pip. Any pair that is XXX/USD is going to be $10 a pip per lot.

Other pairs vary. Basically, you want to trade $5 a pip. If you're trading USD/JPY, its $8.60 a pip for 1 lot, so you want to trade around 58,000 to get $5 per pip.

FXSol has a great pip calculator in their platform. Hope this helps.

Leverage doesn't really apply here. It doesn't matter if you're trading with 50:1 or 400:1 leverage, the price per pip is going to be the same.

Thank you for answers.
But what advantage leverage gives (or takes away)?

The simple answer is leverage allows you to carry more open trades. A higher leverage will give you the benefit of trading more lots. In your situation of 2% per trade, this really doesn't apply. If, however, you are opening multiple positions, with each one representing 2%, a higher leverage will allow you to take higher losses in these positions before a margin call is initiated. I wouldn't worry about it if you are only keeping one trade at a time open, each of which is less than 2% risk.

If you want more information about leverage, there are additional threads in the beginners forum. Maybe Eastmaels can chime in with some links as usual.

Thank you very much, Twinchell. It really helped me to clean up a mess in my head (at least a little).

It depends on what lot size you are trading: standard, mini or micro

For a standard lot each pip is worth $10
$10 times 20 pips = $200
$50 divided by $200 =
0.25 standard lots or
2.5 mini lots or
25 micro lots

In each case, the position size = $25,000

200:1 leverage is the maximum your broker provides. The only advantage this offers you is a lower margin requirement.

The leverage of the trade is called True Leverage and is found by dividing the position size of the trade, $25,000 in this case, by your account size of $5000. So $25000/$5000 = True Leverage = 5:1

5:1 leverage is okay IF you have a lot of experience. It is NOT okay for a beginner. A beginner with little to no experience will wipe out their account using 5:1.

A beginner should use 1:1 leverage or less until they have learned how to trade with consistent profits over time.

A beginner should also trade a micro account with $1000 lots. Period. End of discussion.

A beginners objective is not making money.

A beginners objective is to learn to trade with consistent profitability over time. If you can't make money trading a single micro lot, then adding more lots is only going to deplete your account faster.

Read the entire Money Management thread slowly and carefully. If you still don't get it, read it again and again until you do. Ask questions as they arise during your reading.

Trading is easy once learned, but learning to trade is very difficult. It is going to take time, a lot of effort, and lots and lots of reading reading reading.

This is the best forum on the web for learning to trade forex, but a person has got to exert themselves and apply effort.

Dial

Dial pretty much hit the nail on the proverbial head, but I'd just add that you should try to not worry so much about leverage right now, and just concentrate on opening as few positions as possible at 1-2%. When you have a system that has been tailored for you, by you, and is successful and profitable, then you can up the risk if you desire. But as Dial has said, if you can't get your head together with 1% risk, then you're just going to deplete your account faster with a higher risk acceptance.

Your main goal should be to survive. If, after one year, you have $10 in your account, you can consider yourself successful. If you break even, consider yourself very successful. If you actually make money your first year, get ready to quit your day job in a few years because you're probably already at the Pro level mentally.

Great advise. Definitely I will follow the 1-2% and low true leverade rules.
To set my mind in a proper way and to learn is exactly what I'm going to do. That's why I have demo account. I set it for 5000 to pretend that it's real money because it's how much I would start with on real account.
So, I'll do my best to keep MY MONEY IN MY POCKET and make it grow.

Thanks again!

I have also had some questions regarding money management in a forex accout versus a regular equity trading account. I found this article to be helpful in explaining how to calculate leverage. Hope some of you find it useful...http://www.tradingfives.com/blog/?p=116