So I’ve been through pip school, and re-read the margin and position sizing sections but I still am having trouble understanding or maybe just understanding the WHY behind how it works.
I still have it in my head that when you trade currencies that you are just digitally handing over lets say USD for EURO and then trading it back when you close your position.
So when you make a trade, your buying a “lot” (standard, mini, micro, ect) and in order to control that amount, your broker may take lets say $1000 to control one stand lot. So why does that NOT make you leverage 100:1? As I read it, its the amount of lots your controling that determine leverage? So if I bought 2 stand lots my used margin would be $2000 and leverage would be 2:1 and I’d be controling 200,000k?
Also, if I get margin called why would they take the the usable margin and not the used margin that I put on the trade?
It would seem to me that if you put $1000 on a stand lot of 100k then you would get margin called after the $1000 you put on the trade was eaten up by negative pips?
So I guess my question is why? Whats going on behind the trade that makes it all so?
And let’s also assume your account was opened in USD.
Pretty much nails it right there. Except for the fact that you are buying 100k in euro, so you use more USD to open the trade than $1000.
At the current exchange rate, it would take roughly $1430.00 to secure a standard 100k lot of euro.
Yes, you would be controlling 200k in euro.
The leverage would be 100:1, and you would use roughly $2860 of margin.
The usable margin is the only part of your account available.
Your 2 lots tie up that $2860. So whatever balance above that is your equity to either add to, or subtract from as the trade runs. The second your available equity dips into that $2860, your trade will close automatically, as the dreaded “margin call” happens. Now here’s another thing to think about. If the 2 lots were opened as one, your close would happen right around that $2860 mark, give or take a little.
However, if the $2860 was comprised of two single lot trades, it would close one first, and that $1430 you used to open the trade then becomes usable margin for the trade left open. Once that is gone, then your last trade would close leaving you a little less than, or a little more than $1430.
If you have enough trades open that all go against you, they will keep ticking closed. As the used margin comes available, it then gets eaten up by the other losers. Bottom line, that’s how Martingale, or gridded systems burn to the ground.
Your missing factor here is, the account size. You wouldn’t be able to open a standard 100k euro trade with only a 1k account. You would need a little bit more than the $1430 required as your part of the 100:1.
Here’s a quick rundown. And I’ll use numbers from your examples.
Say you had a $5k account, and your leverage was 100:1 and you opened an inadvisable trade of two standard euro lots short.
The margin used would be roughly $2860.00 US, the pip value would be $20 a pip.
You have $2140 usable margin to play with. At $20 a pip, that’s 107 pips. Price moves against you, and you have no stop. 107 pips down, your trade gets closed, and you’re down almost half your account.
You can now only buy into a trade for ONE standard lot. Your used margin would be $1430, and your gain/loss per pi is $10.
You have +/- $1430 left in the account as usable margin. 143 pips between you and disaster…
If you are in the US, your leverage will only be 50:1, so that puts a bit of a crimp into buying those standard lots. One standard euro lot at present prices would cost $2860 in used margin.
Originally, when the time comes I was going to open a mini account with 10k. But then after reading pip school I realized, for what I wanted to do I was going to need more capital (20k). I really want to have two trades going at a time, one swing or position trade going, and then maybe a daily trade. With my job, I have the ability to trade the London market 2-5:30 or 6am est. I’ve been studing the fundamentals for years already, and trading on paper and have been 100% accurate so far on my position trades (maybe 1 or 2 trades a year), its the day to day markets and chart patterns I need to nail down.
So with that said, I want to trade mini lots and stick with 1:1 or 2:1 leverage. To be honest I haven’t even opened a practice account yet. So my question is, are these things like leverage going to be obvious when I want to actually place a trade so I don’t hit a button and place a 100:1 trade. Lets say, an account with 20k in it, I place a trade for one mini lot of Euro/USD as a position trade 2:1 leverage, taking (according to the calculator) $7155 of used margin, plus a second day to day trade of another pair 2:1, … mostly maxing my used margin at 15k (if trading GBP) giving me 5k left or 2500 pips at 2$ a pip of equity. Risking $100 dollars a trade with my stop loss I’d have to loose 50 trades (day to day) in a row to bust my account. Am I understanding it right? (of course assuming my position trade did not move at all).
Leverage is set at your account level and not at the individual trade level. I don’t know what the lowest level you can go is in all brokers but I think it’d probably be 20-1 or possibly 10-1.
Ok, now you got me really confused:34: Why all this talk in the pip school about how most professional traders use max 2:1 or 3:1 leverage if as low as you can go is 10:1? Or am i missing something…
What the school means is that professional traders don’t over-extend themselves by taking advantage of the sometimes huge leverage some brokers offer to open up a standard lot trade with only $2k in their account. They manage their risk by opening up smaller positions in larger accounts. I think that really low leverage would only be available to more institutional type traders. Retail trader brokers don’t typically offer 2-1 as far as I know.
In effect though the professional traders are not even thinking about leverage. They’re looking at the amount of money they’re willing to risk on a trade and working out their stops and position sizes to match this. If you’re trading mini lots in a $20k account then when you’re trading $1 per pip or thereabouts you don’t need to be worried about leverage - you can’t be over-leveraged if you only open up 2 position trades of 1 mini lot each and then only daily trade of 1 mini lot. You’ve effectively got $3 per pip or thereabouts in play depending on the pairs so for you to bust your account completely you’d have to have each trade move against you by over 2,200 pips.
What you’ll be looking at is where your 2 position trades’ entry points and stops are going to be. How much room are you prepared to give each of your position trades before you decide they’re wrong? How much money are you prepared to invest in this particular trade? If you’re playing a position trade over 6 months you might decide that you’re ready to give it 500 pips breathing room. Then you’ll need to decide what percentage of your account you’re willing to risk on this position trade. So if you want to risk 2.5% of your account on each of those trades you’d be looking to risk $500 in each one. With a 500 pip stop you’d be able to enter at $1 per pip.
Then on top of that you’ll be doing the same thing for your daily trade. There you might look to risk 1% ($200) of your account and give a trade a 50 pip stop for example. In this case you could enter a trade worth 4$ per pip.
By working out your risk %, entry point and stop for each trade in advance you can control your entry lot sizes so that they fit with the type of trade you’re planning to take be it long term position trade or a daily trade. Leverage won’t really come into the equation once you manage your risk level appropriately. If you want to get a feel for this open up an Oanda demo account and play around with changing the leverage and making your entries.
If you had a 20k US account, and were trading 1 mini lot at a time, you would be leveraged at 1:1.
A mini lot is 10k of the currency you are trading. Lets say you have a 20k account. And opened one mini lot euro. Even though you HAVE leverage, and your used trade margin is $140, theoretically you wouldn’t NEED leverage, because your lot is sized within your account equity . Your opened trade would be controlling $14,000 of euro currency, and your account is 20k.
For the next example, lets us USD/JPY for the simple reason that it takes $1000 to open a standard lot, and the math is easier for explanation purposes.
With your 20k account, if you open 1 mini, you are inverse leveraged at 1:2, if you opened 2 minis, you would be leveraged 1:1 (unless your trade went negative).
With 4 mini lots you would be leveraged 2:1, 10 minis, and you would be leveraged 5:1. 20 minis would be 10:1, and so on.
So no matter what the broker leverage is at the time you open your account, if you can break trades down into minis, or micros, YOU ultimately control your leverage.
Talon D said it best. “My account size is my lot size”.
So if he had 2k in the account, he would be trading two micros at $0.20 a pip.
Leverage is a useful tool as long as you understand the dangers of it first.
I use a few different strategies for trading, depending on the current market mood.
Within those different strategies, I have varying money management plans. But NONE of them use even 50:1 margin that I have available.
Max is 10:1, and tight stops there. You just sleep better at night
Leverage is the carrot in front of new trader’s noses. But it’s an account killer for the most part.
You’ve been flooding this forum with questions about the basic mechanics of forex trading — the sort of questions you should be answering for yourself by studying the Babypips School, and practicing what you have learned in a demo account. That’s what demo accounts are for.
You sound like a kid who’s afraid to get behind the wheel of a car — who’s asking all sorts of questions about how to adjust the seat, and how fast the windshield wipers should go.
[B]Open a demo account.[/B] Place a hundred minimum-size demo trades. Watch what happens. Observe how your platform works. Push all the buttons. Click on everything. Ninety percent of your elementary questions about the nuts and bolts of trading will answer themselves.
Demo accounts utilize PLAY MONEY. Your’re not afraid of losing play money, are you?
. They manage their risk by opening up smaller positions in larger accounts.
A mini lot is 10k of the currency you are trading. Lets say you have a 20k account. And opened one mini lot euro. Even though you HAVE leverage, and your used trade margin is $140, theoretically you wouldn’t NEED leverage, because your lot is sized within your account equity . Your opened trade would be controlling $14,000 of euro currency, and your account is 20k.
Thanks again for the help. I think ^^ is what I was looking for. Pip school was great but didn’t really tie everything together like that which left me some questions.
So I know I understand, account size, lot size, and number of open position control leverage. As long as the amount of money your controlling does not go over your account equity, then your not using leverage.
Before I think I was confusing leverage and margin a bit, but still, why do brokers even take used margin out if its really the equity/lot size that is determining leverage, ability to stay in the trade, and profit/loss sizes.
[QUOTE]. They manage their risk by opening up smaller positions in larger accounts.
A mini lot is 10k of the currency you are trading. Lets say you have a 20k account. And opened one mini lot euro. Even though you HAVE leverage, and your used trade margin is $140, theoretically you wouldn’t NEED leverage, because your lot is sized within your account equity . Your opened trade would be controlling $14,000 of euro currency, and your account is 20k.
Thanks again for the help. I think ^^ is what I was looking for. Pip school was great but didn’t really tie everything together like that which left me some questions.
So I know I understand, account size, lot size, and number of open position control leverage. As long as the amount of money your controlling does not go over your account equity, then your not using leverage.
Before I think I was confusing leverage and margin a bit, but still, why do brokers even take used margin out if its really the equity/lot size that is determining leverage, ability to stay in the trade, and profit/loss sizes.
Clint
Don’t know if two threads is “flooding” but the forums do seem to move kinda slow, I don’t want to hit everyone with a million emails every-time I post. In fact, where in accounts settings do I turn email alerts off?
I do appreciate all the help, and like I said before, I like to understand everything. The mechanics behind it all ect. ect. I did read the relevant sections three times before posting. If I figure it all out I’ll stick around and one day I will be a FX-men honorary member, in fact count on it. I learned film-making all from a couple of forums and some books (and hands on) and am pretty much a regualar over at dvxuser and contribute quite a lot. So I know how it feels when you get dumb questions… we all got to start somewhere.
Also, I did not want to waste my 6 month trial period at saxo, but not sure if I’m going to use them. The platform doesn’t help me with the why either.
I did read the relevant sections three times before posting. If I figure it all out I’ll stick around and one day I will be a FX-men honorary member, in fact count on it. I learned film-making all from a couple of forums and some books (and hands on) and am pretty much a regualar over at dvxuser and contribute quite a lot. So I know how it feels when you get dumb questions… we all got to start somewhere.