I’m a newbie with enthusiasm and developing knowledge.
I’ve been trading on a demo account for a couple of weeks now and am improving all the time with identifying trends, learning from my mistakes, noting when and why I made profits etc…
One thing I can’t get my head around is this:
I’m using FXCM platform and so can only trade $100k lots and making say $2000 per week. Now when I go live, I haven’t got $100k, so I’ll open a micro?? account with $1,000 - does this mean that because the lot sizes are one hundreth of the demo account, the profits will be one hundreth as well??
I thought this is what leverage was all about, you deposit $1,000 but are playing with $100,000 (100:1 leverage).
Also, for similar investments - how much profit would you think was reasonable to take in a day / week/ month etc…
I think the current financial crisis in the US is lesson of how dangerous leverage is as even the smartest guys on the planet and large institutions got killed by one bad, over-levered trade.
Wall Street firms hire guys with PhDs (math, economics, finance, etc.) from the best schools, to create risk models and systems that told them they couldn’t lose money. So, they levered up positions in the subprime mortgage (up to 30 times) and made good money. Of course, as we know the subprime mortgage fell apart and whole institutions went out of business or had to be taken over.
So, if the smartest guys on the planet, with unlimited resources and information available, got killed overleveraging, why should we try it?
Unless you have a broker who offers above 100:1 leverage, you can’t even open up a 100k position with just 1k in the bank. And why would you want to? Less than 100 pips loss will margin you out. Sure if a trade went your way you’ll bank, but that’s not thinking defensively. That’s not surviving. Surviving is how the pros think, which is what newbies should be thinking as well.
What’s wrong with with taking a $10k account and opening up 10k unit positions? That’s 1:1 leverage and 100 pip loss is only a 1% loss ($100). 100 pips or more is +1% or more gain. That may not sound like a lot, but if you’re averaging 1% a week with low risk and volatility in your account, you’re beating Wall Street handily (67% annual return…performance most managers would kill for). You’re also trading less AND with less stress. Makes sense right?
Treat leverage as an instant loan from your broker against your deposit whereby your broker supplies you with X times more money than you have for your trade (exchange transaction). E.g. if your leverage is 1:100, the broker gives you 100 times more money for your trade.
This is mathematically true, I am with you, but which currency is moving 100 pips actuallly so fast that you can not set a S/L order? I am a beginner, but I still believe in two principles.
I can find a strategy that improves my 50% chances to make a winning trade
I can apply money management principles in order to survive 10 losing trades.
Statistically I would survive, wouldn´t I?
Now my problem is the psychology… it is killing my account. I guess this is why autotrading was done.
Depends on where you are located Peter, if you are US based your margin is now at an allowable level of only 50:1. Not sure if this is what you meant, but I strongly suggest you don’t use the same money management principles with a $1,000 cash account that you were using in you’re $100,000 demo account.