There is No "Limit Down" in Forex, Is There?

[FXAssassin]

Am I right that because there's no central clearing house and the market lacks extensive regulation, I don't have to worry about the whole "limit down" thing that we find in other markets, right?

[Cyco]

No there is not.

I also suspect the word 'extensive' is unnecessary in your comment

[FXAssassin]

No there is not.

I also suspect the word 'extensive' is unnecessary in your comment

I originally left that word out....but the whole 50:1 leverage limit thing to U.S. customers has left a sour taste in my mouth and forced me to be a bit more precise in how I presented the idea.

[Cyco]

US customers are regulated, but the market itself is not. A subtle, but none the less important, distinction.

[MikeHeart]

The forced 50:1 leverage in the US by the NFA (US regulator) helped forex traders to profit more. Roughly 30% of US traders are profitable. You can use 50:1 in any brokers, not just US based.

[Mr Gone]

Market can go infinitely against you.

[FXAssassin]

The forced 50:1 leverage in the US by the NFA (US regulator) helped forex traders to profit more. Roughly 30% of US traders are profitable. You can use 50:1 in any brokers, not just US based.

How does restricting leverage to 50:1 increase profits? That makes no sense and sounds like something someone made up without thinking about it. Look through a few of my past posts. You'll see clear-cut explanations of how 50:1 leverage limits actually make certain highly profitable strategies impossible to even implement. It's like, you make a lot of money with higher leverage and you make ZERO money with 50:1 because you can't even put on the trade in the first place because of the leverage limits.

[Mr Gone]

How does restricting leverage to 50:1 increase profits? That makes no sense and sounds like something someone made up without thinking about it. Look through a few of my past posts. You'll see clear-cut explanations of how 50:1 leverage limits actually make certain highly profitable strategies impossible to even implement. It's like, you make a lot of money with higher leverage and you make ZERO money with 50:1 because you can't even put on the trade in the first place because of the leverage limits.

Dude, I barely use leverage, 1:5 would be excessive for me, i might be using 1:2.5 or less, leverage is a fools trap, the fastest way the brokaer can take your money away.

[FXAssassin]

Dude, I barely use leverage, 1:5 would be excessive for me, i might be using 1:2.5 or less, leverage is a fools trap, the fastest way the brokaer can take your money away.

I guess we'll just have to agree to disagree on this one. The math just doesn't back it up.

Let's just say you had a positive expectancy system that, when studiously applied, returned a 1:2 R/R and a 40% win ratio. I you were to risk $1.00 p/trade on this system and worked through 100 trades over the course of a year, then the simple math says that you'd end up with forty $2.00 winners (40% win ratio) and 60 $1.00 losers. That means you'd have $80-$60 or $20 worth of profit (leaving the commission out of it). Now let's bring the leverage in.

Let's also assume that with 200:1 leverage you could work this system at a max of 5% p/trade on a $1,000 account. Let's also assume that if the leverage is restricted to 50:1 then the position size is cut by a factor of 4 so that you can only risk 1.25% p/trade on the same account with the same system. Now let's find out how the numbers work out without factoring in any compounding effect:

5% p/Trade @ 40% win Ratio over 100 trades (Flat $50 risk p/trade earning $100 for every win)

Winnings: 40 x $100 = $4,000
Losses : 60 x $50= $3,000
Profit: $1000

1.25% p/Trade @ 40% win Ratio over 100 trades (Flat $12.50 risk p/trade earning $25 for every win)

Winnings: 40 x $25 = $1000
Losses : 60 x $12.5 = $750
Profit: $250

Same system, but the higher leverage allows for greater profits.

The counter-point, of course, would be that why not take 10% risk p/trade, or 30% risk p/trade?

The answer to this is that you need to factor in for losing streaks. This doesn't mean, though, that you pick some arbitrarily small risk p/trade. The best idea would be to figure out what the maximum losing streak would be for your particular system and then choose the MAX risk size p/trade that would allow you to make the most profit and still not get wiped out when the once-in-a-lifetime event happens.

For a 40% win system over the course of 50,000 lifetime trades, the max losing streak that is ever even remotely expected to be sustained is 21. In order to find the worst case scenerio, we'd need to find the smallest number of total trades so that when that number of trades is multipled by 0.60 (the losing ratio) it turns out to be this 21 loss streak.

Since 35 x 0.60 = 21 we know that this is the starting number.

So lets assume that you had $10,000 and made a total of 35 trades in a given month. For worst case-scenerio purposes, let's say that this losing streak of 21 trades comprised the full line of your last 21 trades for the month. This means that in order to meet the 40% win ratio, you'd have to have piled on all the winners at the beginning of the month.

How would this play out for both the 5% risk and the 1.25% risk versions of the same system?

5% Model

Starting Balance: $1000
After 14 Wins: $3797
After 21 Losses: $1,293
Drawdown = 66%
Profit: $293

1.25% Model

Starting Balance: $1000
After 14 Wins: $ 1413
After 21 Losses: $1085
Drawdown: 23%
Profit: $85

Let's notice a few things here:

1) Even if only risking 1.25% p/trade, with a 40% win ratio you WILL hit a time where you'll lose 21 times in a row and during that time you'll take nearly a 25% loss. You can't dodge this drawdown because you can't stop yourself from hitting the black swan event. It WILL happen.

2) Even though the first version of the system used larger leverage to take on larger amounts of risk, the same 14 winning trades and 21 losing trades would have ended in the "riskier" system producing a greater profit margin.

[Mr Gone]

Mods, jus give the reprimand for advanced for what I am going to do. Dude, with 5% risk per trade, you only need 20 in a row to get out of bussines, are you in drugs? My winning rate is 35% it means for each 100 trades, 65 are loses risking les than 1% i can have 60 loses in a row and still having some cash left. Don't say you are having 40% because 10% winning rate is more than difficult and don't say you will not have 20 loses in a row because it is just a matter of time. You are just another gambler, it is your money anyway, do as you please, I don't care.