For a few months I tried trading GU for a 2% per day gain with no more than 1% risk. For example, either 20 pips TP & 10 SL or 40 pips TP & 20 SL. Some days it was like shooting fish in a barrel but other days them damn fish shot back. LOL! To be honest, I wasn’t very successful with it. Now I seem to like longer-term strats, more waiting for “my set-ups” and not forcing trades everyday. I’m still not having all that much success but it’s getting better LOL… :eek:
I think it’s a tough gig to consistently pull pips out on a daily bases using lots of leverage and control the risk. The risk is leveraged too!
You need to check your state laws too. In my state, foreign exchange profits are taxed at 6% just like capital gains.
Right now, to find the IRS tax rate you need to add the short term capital gains rate (currently 15%) plus the long-term capital gains rate (currently 30%) and then divide by 2, this is currently 22.5%. However once the 2001 tax cuts expire the short-term rate will rise to at least 20%, raising the effective rate for forex traders to at least 25%. So in my state that would mean you’d pay 25% to the IRS and 6% to the state, for a combined rate of 31%.
There is also talk of raising the capital gains rate on high earners (over 250K) to 39.6%, which would clobber your compound interest equation even further (since the effects of compound interest are exponential, the drag added by taxes is also exponential). And if that happens, in my state you’d pay 39.6% to the IRS and 6% to the state, for a combined rate of 45.6%.
But realistically, most traders simply aren’t willing to trade with larger and larger amounts of money, and that’s why the compound interest equation doesn’t pan out, even for consistent traders. I am relatively new to forex, but I know a few futures and equities traders with large accounts and they all risk a good bit less than 1% per trade. They also don’t compound their accounts anymore – profits are taken out of the account and put into debt markets for fixed-income returns. My sample size is small here so I don’t know if this is “standard procedure” for larger traders but I would assume so. I remember reading in one of Alexander Elder’s books that he doesn’t consider a trader to be successful until they’ve made enough money to live off of the interest from a municipal bond portfolio.
WOW… great responses! Thank you so much! I appreciate the info on the liquidity, and also that scalping 50 pips a day would be extremely difficult based on the spreads… Magnolia, awesome examples of the importance of taxes on forex profits! I looked up municipal bonds (sadly I am new to a lot of this, but a quick learner!), could you help me go into some more realistic number of muni bond portfolios? I understand the basics of what an individual muni bond is, but I am struggling to see major “steady” income from them? I looked at a few sites and they gave examples of bond portfolios worth around 4.5 Million dollars, these pfolios pulled in around 200k a year. If someone bought 5 muni bond portfolios would they just simply make 1 million a year without any work? Of course that would require a 22.5 Mil deposit… but still? What restrictions are there on muni bond pfolios? Could someone invest 112.5 mil and then just sit back and watch as 5 million (mostly if not entirely untaxed) dollars floated into his/her wallet?
Let’s keep the discussion going on possible restrictions/barriers/hurdles for forex compound growth, but let’s also open up a new discussion on municipal bond portfolios (because I have about 15 minutes of knowledge on that subject, but I am very interested!).
It is definitely possible to make steady income off of debt market investments. You can do the same thing in the equity markets with dividends off of stocks, Business Development Companies (BDCs), Real Estate Investment Trusts (REITs), etc. Personally I focus on the debt markets because they are easier for me to understand, but I encourage you to explore both. Here are my responses to your questions from the perspective of the debt markets:
You don’t need such huge sums to invest in municipal bonds. The source you found may have been talking about primary market bond offerings, which you won’t need to worry about. In the secondary market you can usually purchase bonds municipal bonds with a minimum of $5,000. There are other ways to get into the muni markets without directly buying bonds – I have seen ETFs (Exchange Traded Funds) on the stock exchange, for example.
Municipal bonds are popular because of the tax advantages (the fed can’t tax state debt, so you just have to pay state taxes). However, there are plenty of other types of bonds to explore. US Treasuries are of course the most popular, because if the US debts on its debt, any alternative debt instrument is going to plunge in value anyway.
The returns from municipal bonds are indeed very low right now due to interest rates being at extreme lows. In years to come, the yields on new issuances of bonds will rise. You would be better off putting money elsewhere right now and then purchasing debt once the yields reach attractive levels. Alternatively, you could purchase higher risk debt called “junk bonds” which returns several percent over the treasury yield (right now junk bonds are at 9-15+%). The yield on this debt is obviously higher because of the higher risk of default. There are some ETFs that buy huge junk bond portfolios to try and limit the risk, JNK is one that comes to mind.
You are correct in that if you had say $1M invested in a portfolio of coupon bonds that produced at annual return of 5%, you would receive $50K per year ($1M multipled by .05) until the expiration of those bonds, upon which you would receive the original $1M investment back. Assuming you are not buying the bonds with the intent of selling them, and that you are only buying them for the stream of income, the main thing you would want to worry about is the stability of the bond issuer (are they going to default?) and the rate of inflation (will inflation rates rise to a point when your money is actually being eroded away due to a yield that’s too low?). As for limitations, the debt markets are certainly huge enough to absorb 112.5M (think of the amount of debt issued by the US government alone).
This is a vast simplification but to provide a general overview: If you bought a bond today issued by a utility company in Arizona at 5.5% interest, and 4 years form now that same utility company was issuing bonds at 7.5%, you will still only receive 5.5% interest on the bonds that you purchased, and if you attempted to sell the bond you would incur a capital loss (you’d sell it for less than you bought it for). This happens because the new debt is more attractive to investers – if debt is available at 7.5% no one is going to purchase debt at 5.5% unless they buy it on a discount. (But again, assuming you bought the bonds for the stream of income, you only care about the financial stability of the issuer and the rate of inflation)
And of course, if you do invest your cash in anything, make sure you approach it with plenty of research. This is just skimming the surface of a huge topic.
Beautiful, Magnolia, simply beautiful information. I will definitely do a lot more research. Basically my goal is to retire as young as possible, so if I invested in something that provided me with a steady cash flow, with essentially little to NO WORK, I will be set. Acquiring the initial investment is where I believe forex can help, because it seems that a substantial amount of money can be made in a few years, (theoretically!), and then it caps off due to many of the restrictions that have been named in this post. So, if a decent sized bank account could be formed, with roughly 100+ million, that money could then be invested into something that would provide a very “adequate” living allowance, based on the interest gains, for the rest of ones life.
So I did a little research on leverage this morning but was pretty unsuccessful. At what point will online brokers stop offering 100:1 leverage, we talked about this a little earlier in this thread, but we had no definitive answers. If you were trading with only 2% of your account… but you had 100 million dollars, would an online broker leverage you to 200 millions dollars with the 2 million you would be trading with? At what point will an online broker say, “you’ve had enough!” Obviously due to the capital aspects of the brokerage they wouldn’t be able to leverage unrealistic numbers, but could anyone find or does anyone know when they lower their offered leverage, is there a set leverage bracket?
Look, by the time you get to that level, you will be dealing with the broker on a 1 to 1 basis, cutting your own deals for the spread and very possibly trading in the real FX market with much less leverage. There is no definitve answer for it as you will be classed as a high net worth individual and can demand your own terms with them. It’s not really worth worrying about.
I’ll echo SanMiguel’s statement and say that it is definitely not worth worrying about.
Also, where I come from that’s called a “quality problem”, i.e. a good problem to have! If you were to tell me that one day I’d have trouble finding a counter-party for 100M of investments, I would be a very happy man indeed.
The trick, of course, is getting to the point where you have 100M worth of capital to allocate
That is precisely my point though! How long can I carry on using a 100:1 leverage… at what point will I be ineligible to use that leve? It makes a huge difference in profit while trying to estimate time frames with compound interest once the leverage begins to lower!
Highly unlikely anyone here can answer that but by the time it becomes a problem, you would have over a million in your account anyway.
What the hell are you aiming at making? It’s a pointless thing to be worrying about. You will be able to trade up to at least $1,000 a point with 100:1 leverage. After that like I said, you will need to “discuss” with your broker…
Ask your broker what their max trade size is…
You think you can handle the emotions of trading that trade size?
Turn off the excel spreadsheet and get practicing
Ok cool, and that may be a decisive difference between choosing a broker! The initial objective of this thread was to call upon assistance in pointing out LIMITATIONS to COMPOUND GROWTH. The key to the topic are those two terms. Without limitations on compound growth someone could make trillions of dollars in a mere decade… but as I’ve observed… there aren’t too many trillionaire online forex traders. We’ve got a lot of really good limitations listed here, and knowing how much an online broker will allow you to leverage at 100:1 is a very important limitation when dealing with compound growth. I am just looking for realistic numbers/figures.
I am actually rather new to trading/investing… I have a degree in Political Science/International Studies, and just recently gained some interest in the market. I have an uncle that is marginally successful trading stocks, and a grandfather that was marvelously successful trading stocks. I am asking all of these questions in an attempt to devise my own trading strategy and expectations, and also develop a game plan.
I played NCAA division 1 tennis for 3 years so I can definitely understand that having a gameplan is very important, but I also equally understand that regardless of how well you’ve planned you cannot plan where the other person will hit the ball, you can only make educated guesses based on “signals.”
I thank everyone for their help in this thread and I would like to continue with the topics that have been spoken of.
I am not in anyway saying that my initial idea was to start an account with $1000, using 3 percent margin, and 100:1 leverage, and make 50 pips a day was my plan. It was simply a starting point to tailor into my own personal (realistic) goal/expectation/plan.
Keeping it real, once you’ve compounded your account to $200K, you could stop there and use this amount as trading capital and skim off the profit to live off… not too shabby a figure using your numbers.
The bigger players typically use 2-4% leverage. The trick is to feed into a position. Even looking at a level II platform, you will only ever see a players $m offerings at certaian price levels. Even with this insight into market level who’s to say the player might perhaps only be showing 10% of an instrument he intends to off load that day. Worse, those bigger number offerings at 20 pips below current price might be withdrawn from the table and you went short! All’s fair in love and war… nobody shows their entire hand in $B lots. LOL
How much over $10m at 1/33? No dealing desk my ass… if the numbers get too big, you can bet their hedge your position.
EDIT: In any event when you get to the numbers your talking about you’ll be beyond brokers and privvy to level III and a bona fide market maker. Don’t forget to look us up on BP and throw the odd ‘tip bit’ our way.
