A few questions

[0074xnz]

First off, let me say how much this site (the school + blogs) has helped me on my journey though the world of Forex! Thanks for the time and effort guys!

Okay, so I've read through the school as well as some other articles / sites but there's still a few things I'm not 100% sure about.

Firstly, leverage.

Now I know it's a double-edged sword and all that, but where is it's disadvantage in this situation:

Suppose I have $10000
I buy 1000 units of EURUSD @ 1.000
Pip value = $1

@ 1:1 leverage, my margin used = $10000 = 0 pips "breathing room" before margin call.
@ 1:2 leverage, my margin used = $5000 = 5000 pips "breathing room" before margin call.
@1:10 leverage, my margin used = $1000 = 9000 pips "breathing room" before margin call.
@1:100 leverage, my margin used = $100 = 9900 pips "breathing room" before margin call.
@1:200 leverage, my margin used = $50 = 9950 pips "breathing room" before margin call.

And so on.

It seems that the higher my leverage, the more breathing room I have, so can withstand greater market fluctuations. Wait... after typing that and reading it over again, I see that if I do get margin called, I would lose more the higher my leverage... that must be the disadvantage...? Hmm... lol maybe I answered that question myself

Anyways, secondly, taxes.

So I've read that non-US citizens (which I am, I live in New Zealand and have never been to the US) don't have to pay the same taxes on gains through the forex as US citizens. When I (hopefully) start trading live, I intend to use USD as my deposit. Does that change anything? Also, do I have to pay taxes to the New Zealand government? If so, does anyone know how much? And what if I make losses?

Any help greatly appreciated

[pipgod]

It sounds like someone besides me understands leverage!

[rhodytrader]

Originally Posted by 0074xnz

Suppose I have $10000
I buy 1000 units of EURUSD @ 1.000
Pip value = $1

@ 1:1 leverage, my margin used = $10000 = 0 pips "breathing room" before margin call.
@ 1:2 leverage, my margin used = $5000 = 5000 pips "breathing room" before margin call.
@1:10 leverage, my margin used = $1000 = 9000 pips "breathing room" before margin call.
@1:100 leverage, my margin used = $100 = 9900 pips "breathing room" before margin call.
@1:200 leverage, my margin used = $50 = 9950 pips "breathing room" before margin call.

It seems that the higher my leverage, the more breathing room I have, so can withstand greater market fluctuations. Wait... after typing that and reading it over again, I see that if I do get margin called, I would lose more the higher my leverage... that must be the disadvantage...? Hmm... lol maybe I answered that question myself

You've actually got your leverage figures quoted backwards from what is normally done. Using 1% margin is 100:1 leverage. Minor point, but important to avoid confusion.

If you buy 1000 units of EUR/USD at 1.00 the value of the position is $1000. If you have a $10,000 account through which you are making that trade, your effective margin ratio is 1:10. By that I mean you are making a trade worth 1/10th your account value. You wouldn't be employing leverage at all.

With that in mind, here is what your "breathing room" before reaching a margin call would look like at different leverage settings:

1:1 (100% margin) - 9000 pips
2:1 (50% margin) - 9500 pips
10:1 (10% margin) - 9900 pips
50:1 (2% margin) - 9980 pips
100:1 (1% margin) - 9990 pips
200:1 (0.5% margin) - 9995 pips

Here's the double-edged sword part.

For any given gain or loss you multiply it by your effective leverage. So if you were to make/lose 10 pips on a trade and were at 100:1 leverage the account value change would be worth 1000 pips.

Notice that I said "effective" leverage. That means the size of the position in relation to the size of your account. If we use your example of a $1000 position on a $10,000 account, that's a 1:10 leverage, so you would actually divide the pip move by 10 to get the account value change.

Hope that helps.

[pipgod]

Originally Posted by rhodytrader

If you buy 1000 units...

Here's the double-edged sword part.

DO NOT INCREASE THE LOTS.

Why on earth would you increas your leverage and then increase you lots.

The error in thinking hear is the increas in lots. The point in increasing leverage is to use less margin for the same size trade in lots.

Thinking like newbs again!


Yes, many are correct in thinking.

They say "but I will increase my gains if I increase my lots."
And then the price goes the other direction and they say " I didn't think that would happen".
"By the way, what is this margin call thing and why did it take almost all of my money?."

[rhodytrader]

Originally Posted by pipgod

DO NOT INCREASE THE LOTS.

Why on earth would you increas your leverage and then increase you lots.

The error in thinking hear is the increas in lots. The point in increasing leverage is to use less margin for the same size trade in lots.

Who said anything about increasing the lots?

[pipgod]

Sorry for the attitude.

You should trade only one lot. Increase your lots only when you either understand leverage or have no need for it.

I have never heard anyone (other than myself) who completely understands leverage.

[pipgod]

Originally Posted by rhodytrader

Who said anything about increasing the lots?

I didn't say your or anyone else increased the lots.

I am thinking about the people who are reading and not posting.
If you want to believe as you believe that is fine.
Bot others are here to learn for free, remember?
They need to know the whole story.

Why does everyone take what I say personal?

[pipgod]

When you (or any one else for that matter) post, think of the many people who are reading who never even become a member.

[rhodytrader]

Originally Posted by pipgod

Why does everyone take what I say personal?

Firstly, because you included a quote from my post in yours which makes me believe that you are responding to it rather than just making a statement of your own, especially when you are using CAPS to shout.

Secondly, because you basically insulted everyone - especially folks who have years, if not decades, of trading experiences - by saying:

I have never heard anyone (other than myself) who completely understands leverage.

And this REALLY confuses me:

I am thinking about the people who are reading and not posting.
If you want to believe as you believe that is fine.
Bot others are here to learn for free, remember?
They need to know the whole story.

Are you reading something in to what I posted that I didn't intend? All I was doing was using the original poster's approach to explain what he was inquiring about since there was an inconsistency in what he had posted. I didn't put anything in there about what I "believe".

[pipgod]

If you increase leverage and not the lots, ( to the many who are only reading and not posting ) the benefit is HUGE.

More people think that the pips I get could never happen. Change your thinking and change your pips.

Understand leverage!

Understand margin!

Understand the power of going long and going short!

Think like the wealthy think (only if you want to be wealthy) and do as they do. You will be wealth too.

They understand leverage, margin, and the power of going long and short. Do you?

If you don't, It's OK.
Hang in there, you will soon enough.