If my account size is $2500, what amount should be traded on each trade w/ 50:1 leverage?
The leverage does not dictate how much you should trade per trade. Levarge is how much margin is required to be in your account to cover a position at 50:1. 1 dollar is required to be in your account for every fifty you trade.
What you are willing to risk per trade and the stop loss of losing trades should dictate how much you trade.
For example, lets say you have a $500 dollar account, only want to risk 1% of your account on any one trade and have a stop loss of 20 pips when a trade goes against you. You would then divide your risk % by your stop loss to get the per pip value you should be trading.
$500 x 1% = $5.00
$5.00 / 20 pip stop loss = .25 cents. You should be trading .25 cents a pip.
This is assuming you have developed an edge that you know that when you hit -20 the trade isn’t coming back. so, the stop loss is based on what you know about your edge, it’s not just an arbitrary number based on how much you are willing to lose.
If anything you want as much leverage as possible because that requires less margin in your account to cover a position and margin calls will be hard to make happen, provided you aren’t an idiot and trade the largest positions you can simply because you are leveraged 100/1 or 50/1.
You only risk more of your account with higher leverage if you use the leverage to it’s fullest extent. If you decide to risk only 1% of your account, you will always be risking 1% of your account regardless of how your leverage is set. The risk will not go up and down with leverage.
The lot size determines the pip value. The pip value is what you make or lose per pip on a trade. The leverage will not change this. The leverage will only dictate how much you need in your account to cover a trade.
For example lets say I have a $500 dollar account with 400/1 leverage. Lets say I think I have a sure trade so I trade as big a lot as I can in one lot with my $500 dollars in one trade. 500 x400 = 200,000 (100% risk). Ya, I’ll trade that in one trade and make a killing… NOT That would be $20 (rounding everything off for simplicity) a pip I believe. If the trade goes just -25 pips against you just wiped out your $500 dollar acount. (-25 is nothing for breathing room in a trade) And that’s not account for the spread, which you have to get past to be positive in the trade. Of course most brokers will margin call you before hitting zero to cover themselves, so it’s even less than that.
I’m hoping this is a demo account. If it isn’t then you should probably close the account until you understand leverage and margin. If you don’t understand those two things then you shouldn’t be trading.
Thanks for the in depth explaination. Thats exactly what I was looking for.
Cheers!
ihatemy925 - brilliant, wish I had thought of that 
Well, I don’t really have anything to add, thephoenix did a great job.
Should maybe just mention that if you open a 200.000 $ position with 500$ and 400 lev, that leaves your usable margin at 0, since all the 500 is locked as security for your position, so you couldn’t even stand a 1 pip drawdown… Which means that the spread would immediately kill you.
Even If you had a $50,000 account I would recommend that you trade either $0.10 or $1 per pip until you know what you are doing.
Just my opinion:
If you win:
2 out of 5: 0.5% to 1% risk.
3 out of 5: 1% to 1.5% risk.
4 out of 5: 2% to 5% risk.
4.5 out of 5: 6% to 10% risk.
Don’t go above 2% unless you are a scalper.
Don’t go above 5% unless you are a scalper and have recorded 200 trades.
Leverage is great :rolleyes: it allows a trader to keep most of his funds at home and send more if needed.
Now if only they would give high dollar accounts 200 to 1 leverage :eek:.
If you win:
2 out of 5: 0.5% to 1% risk.
3 out of 5: 1% to 1.5% risk.
4 out of 5: 2% to 5% risk.
4.5 out of 5: 6% to 10% risk.
This is a tad confusing:confused:
Your risk really should not be goverened by your win ratio if I am reading this right.
You should have a well defined money management system in place regardless of how much you win or lose. If your just starting out, i’d say .5% if you’ve been at this a while, then you’ll know where your risk appetite lies.
It is if your goal is maximizing your returns and minimizing risk of ruin given the odds and the probability of winning 
It is if your goal is maximizing your returns and minimizing risk of ruin given the odds and the probability of winning
Well it is true more risk, more reward… Hard to say with out know what type of trader you are, though, in general if you tend to win big, its just a matter of time till you get burned big. And as most in this forum are trying to learn the ropes of trading, i would suggest a very conservative approach till you know exactly what your are doing and have a tried and true trading plan…
6-10% is crazy for a newbie to start off with.
Compound up, compound down. When you win a few increase your pip value, when you lose a few decrease your pip value. If you have a good edge where you win more trades than you lose and don’t let your losers run, you will gradually compound up.
Hello,
I am getting very confused about pips and lots and margins, and how I should be using them. Is there a book or a site that has more scieniors as to how to use the calculations?
I just don’t want to move on until I fully understand the calculations needed in pips and lots. Also, is there a way to down load the School of Pips courses?
And just one more thing, this may not have anything to do with forex, but my firefox is very slow and I was wondering if anyone would know who I would contact to see if the problem can be fixed.
Thanks in advance
The School of Pipsology.pdf link has been removed since the school is being updated and a link to the new pdf will come soon.
Margin = how much money you have in your account. I like to think of it as, “margin of error.” Margin is your actual account size, in other words what money you put into the account, plus or minus, your winning or losing trades.
Leverage = how much money/margin is required to be in your account to cover a postion. For example: 100/1 leverage requires that you have 1 in your account for every 100 you trade.
Pip value = size of lot you trade. I recommend doing a search on google for pip calculater. Then you can play with lot sizes and see the result.
Example: 100,000 = $10 per pip. (depending on where the currency is at this is a broad example rounded up)
Pip value also = How much your account will go up or down, per pip, when a trade moves. So if you are trading a 100,000 lot which = $10 per pip and a trade goes against you -30 pips you just lost: $10 x 30 pips = $300.
So, you can see why if you have a small account and are stupid enough to trade big lots, how fast you will get a margin call.
Continuing on a point made by ThePhoenix about compounding, whatever you do, do not increase your lot size just because you had a few winners or losers in a row. It happens time and time again where someone thinks they are on a “can’t lose” winning streak, so they increase their lot size only to give it all back in a few trades. It will be easier to see how well you’re doing over time if you have a clearly defined plan for increasing/decreasing lot size. For example, “When I have increased my equity by 10%, I will increase my lot size by 30%” or something like that. Personally, if I start a week with one lot size, I finish the week with the same lot size, so that it is easier to gauge my performance on a week-to-week basis.
Exactly. What dragon33 does is up every time he hits +200 pips, and I believe if he loses three in row he takes it back down.
I adjust from the start of the day and trade whatever value my account is currently at. If I lose two in row I take down my trading size if they were my full stop loss.
The real danger of compounding comes from yourself. It’s easy to compound up when you are on a winning streak. What will happen when you lose is that you will let it slide that you should be compounding down and descreasing per pip value, and then you end up risking way to much on your account.
As long as you have an edge with a good win/loss ratio and one loser doesn’t eat all the winners, compounding up and down will work in your favor.
It’s really not that difficult:
The pips at risk are determined by the trade – the type of trade, the timeframe, etc. If you are doing a reversal trade on an hourly chart, for example, your stop loss would be set just beyond the reversal point and would probably be in the 10-30 pip range.
Then you just calculate what the position size needs to be so that those 10-30 pips are worth the amount you want to risk.
Say you want to risk 2% of your $1000 account per trade, or $20, and the stop for this trade is 20 pips. Obviously you need each pip to equal $1. That means a position size of 10,000. If you were doing a very short scalp trade where your stop might be only 10 pips, then each pip would have to equal $2, so a position size of 20,000. (Note: these position sizes are based on EUR/USD, GBP/USD, etc – stuff like USD/JPY or cross currencies would be calculated differently).
Compounding risk is the best way to trade.The rule is have a minimum and maximum base amount.Let’s say you have $1000.00 in your account,if you go below that amount you reduce risk but if you go above you increase risk.Lets say your maximum target is $2000.00,If you increase risk with any small amount you win you can hit 2 grand easily but you have to withdraw it immediately and start over again with your base amount($1000.00) and lots.Keep repeating it and you will notice your bank acc is changing:) Don’t try to build equity in FX acc,it’s hard to see it flactuating. See i don’t beleive in risk only 1 or 2 percent rule of your acc till you get better,maybe if you trading for retirement or your kids college fund then maybe that’s a good idea.The thing is you will never get better in the markets,you will gain experience though with time to avoid a lot of mistakes.
The markets are always changing and the best thing is to adapt and trade accordingly.Yall know how hard it is to win in the markets,even the pros(mutual/hedge funds and banks) don’t have many wins.why do you think most of them fail?The successfull ones uses alot leverage to win a few times a year to beat the S&P 500,then they look like heroes.If you wanna make a living of this you got to use leverage,it’s a double edge sword but if you manage it right you can be very profitable or successfull.If you know anything about poker,you don’t always get the best cards/hands but if you can manage or bully your opponents with your chips you can come out as a winner.Trading is about probabilities and the so called trading system/strategies are all gimmicks.
I hear what you guys are saying, but I believe:
As your account grows risk more and as your account declines risk the same.
Now lets look at an extreme example of what happens when you use don’t use the above:
You have $100 and you are trading at $1 per pip and are trying to grow your account by 50% per day over a series of trades.
If you lose half of your account (50 pips) then you reduce your trade size by half and now must make 100 pips at 0.5 per pip just to break even!
Do you see what you are doing to a lesser degree?
All previous losses are magnified as you notch down making it harder to over come them until you reach your high water mark again.
It is like a temporary(?) handicap…
If it was correct to increase your trade size then it is correct to stay at that level.
If you start with $2,000 and risk $100 then continue to risk $100 per trade and use your leverage to stay at that level.
If it is likely that you will have a draw down where you will be unable to trade at that level at some point then TRADE FOR LESS NOW, do not wait until you accumulate a few losses and then magnify those losses by trading for less later.
If you are trading at 5% risk and your account can handle another mini then add another mini, but do not leave that mini behind just because it got wounded and you have to stop to drag your buddy to safety as bullets are flying.
Or do none of these things what do I care 
That’s one way of looking at it. But, I think logically it’s doesn’t work well that way. From my short live experience I can tell you I have found if you keep it at the same level after a loss, when you should have recalculated pip value, you may end up making and even bigger loss. Of course I’m basing this on short term trades that last a few minutes at best, not long term trading or even swing trading.
The important part in the equation is that you have an edge that has more winners than losers and your losers are equal to or less one of your winners. Otherwise even compounding isn’t going to help grow your account. I’ve found the hardest thing about trading is not letting losers run hoping they will come back. Simply getting out of bad trades at judicious times has made some trading days profitable. Over time I’ve started to learn to cut trades even if they havn’t hit my full stop loss, I’m getting a sense for when the trade isn’t going to go my way.
I am doing that now with a 6/10 win ratio. (often better) 30 pip TP & 30 pip SL. I up my pip value every time I get 30 pips, I readjust down if I lose 30 pips. So, far at worst it’s worked like three steps forword one step back. But, if I were to keep the same pip value I had before a loss, and lost on the next trade, and the next one after that, it would be more like three steps forward three steps back…or worse.
This way, even if I do a few bad trades and lose I can still have an account to trade with and can still keep getting experience and sharpen my edge.
IMO, you should always base your trade size on what your account size is not what you want or what you had before you lost.
It is true that while trading always have an eye on the losses you are facing. Because the losses you face show you the proper way to profits.
Right, the best thing to do is learn from your losses, otherwise you will be facing hard times.