A few questions

Beginner Questions
1

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! :slight_smile:

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 :stuck_out_tongue:

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 :smiley:

2

It sounds like someone besides me understands leverage! :cool:

3

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.

4

:mad: DO NOT INCREASE THE LOTS.

:eek: 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!

:frowning: 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 " :confused: 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?.”

5

Who said anything about increasing the lots?

6

:o Sorry for the attitude.

:o 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.

:slight_smile:

7

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?

8

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

9

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”.

10

:slight_smile:

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

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.

:slight_smile:

11

rhodytrader,

I have respect for your knowledge and wisdom.

Please do not defend yourself. You are fine. Please understand that I am not talking to the fine people of Babypips.com.

If I have offended anyone I am very sorry.:frowning:

Please, I ask for your forgiveness.:o

12

:slight_smile: For the record:

Who has years of experience that I have herd speak?

If there is one, and he does not understand what I meant, I apologize.:frowning:
I truly am sorry.:o

To all others, if you think about what I said (with out taking offense) you will have an awesome future.

:slight_smile:

13

For the sake of the lurkers then, why don’t you explain exactly what you mean when you say this.

14

If my brother was reading this (who is not a member) he would be mad at me.

Again I am sorry:( , I am not speaking to the good people of Babypips.com.

15

:slight_smile: Now that I read back, the reason for the caps is to OVER STRESS the point.

Sorry rhodytrader.

16

Ya know, I can’t spell a lick.

Most everyone knows this already.
As my son would say “Like father, like son”.

I use spell check most of the time. The thing with that is spell check doesn’t do grammar. I have a hard time sounding smart. The only reason I want to sound smart is so that someone (if only one) would learn a little and improve there life the way they wish.

I am not as smart as most of the people at Babypips. I do get some pip sometimes. The point is that if I can get pips every now and then so can anyone else.

17

Thanks for listening.

18

Dirk du Toit wrote a pretty decent two part series on leverage a while back.

It’s vitally important to know the correct meaning of words such as leverage, margin and gearing. You have to be able to see through the marketing blitz from all the forex brokers and understand that the ability to borrow all the money that they’re offering isn’t necessarily in your best interests.

Articles that might be of interest are Leverage is not even a double-edged sword, it’s a guillotine - and your head is on the block – PART 1 and PART 2.

19

colin,

Thank you sir. That was an awesome read. The wonderful people out side and inside Babypips.com have more information to make an educated decision. I recommend the read to everyone.

:slight_smile:

20

Can anyone answer this question?

I have a $10,000 demo and I want to risk 1% of my capital. The leverage is [U][B]100:1[/B][/U]. I open a lot position short on the EUR/USD. If the EUR/USD moves 100 pips long what is my loss? If the EUR/USD moves 100 pips short what is my profit?

I have a $10,000 demo and the leverage is [U][B]200:1[/B][/U]. I open a lot position short on the EUR/USD. If the EUR/USD moves 100 pips long what is my loss? If the EUR/USD moves 100 pips short what is my profit?

Each demo has a trade of only 1 lot.