Hi everyone this is my first post. I’ve been looking around at the educational tools & forum in this site and trying to absorb as much as possible. What a great site this is!
While reading up on some stuff, I came across one burning question:
Say I have $10,000 in the bank. I start an account with the broker and instead of depositing the FULL $10,000, I only deposit the 3% I am willing to risk per trade, so I only deposit $300. I then take a trade with 400:1 leverage. If the trade goes well, I make a ton of money. If the trade goes bad, I get a margin call and lose the $300 which was my risk anyway. So the margin call kinda acts as a stop loss. Then I repeat the process by depositing another 3% and so on. That way, I never have to deposit the full $10,000 into the account and risk losing it all using 400:1 leverage and getting a margin call. Basically, this will eliminate the risk of using such a high leverage. Do you see where I’m getting that?
Anyway, maybe I’m just a beginner and I haven’t learned a lot about broker policies yet but is this method possible?
Well you are a newbie and you have posted this question here-and I feel obliged to answer why this gig of yours will not work-
at 300 bucks your micro account will probably allow you to buy a max of 100,000 micro lots where a pip cost is 10 cents.
at 30 pips in your favor the profit you will make will be 300 dollars, at the same 30 pips against you, you will lose 300 dollars (get a MARGIN CALL :D)
So assume, you lose the first 300 (which is not highly unlikely in your situation)
so that means now to break even you need to make atleast 300 (let alone be profitable) so you see where I am going with this.
Please don’t do this-learn fx and then invest a big part of the 10,000 not just 300.
Yup, as the link provided by sandpipper suggests, 250-300 USD account and then using 400:1 leverage is harakiri.
If you are really nervous or hard pressed, but nevertheless want to taste the fx fruit with a 300 account then please, please keep your leverage to a maximum of about 10:1, that means even if you made a trade that is glaringly bad (which you will the first 3-4 months of your career) you will may be only lose 100-120 dollars (worst case) and that will be a big learning incentive against getting a margin call at just 30 pips which IMO a death sentence for noobs!
Hey guys thanks for answering my question! So I’ve gone through the whole babypips ‘school’ and that specific section is the one I was most confused with… which is why I’m asking this question.
So let me get this straight. Say I deposit the full $10,000 into a mini-account. Using 100:1 leverage, I buy $970,000 which if I’m right, would be 97 lots making my used margin $9,700? ($100/mini-lot with 100:1 lev)
30 pips in my favor would give me 97lots x 30pips x $1/pip = $2,910? (Seems odd)
The $300 in usable margin should be my 3% risk? But that would also mean that I would get a margin call in just 4 pips against me (97lots x 4pips x $1/pip > $300) so that wouldn’t be a great strategy.
However, if I were to buy 10 lots instead putting $1,000 into used margin, then my profit at 30 pips would be $300 and the amount of pips that would wipe out my 3% risk would be 30 pips? ($300 / 10lots x $1/pip) which would be a much better strategy.
I’m sorry for getting all technical here but math is not my strong side. I feel like this is a major road block right now so I need to learn this logic so I can develop a proper money management plan. I wish the section on babypips could have given some examples of successes using leverage and gaining profit instead of all examples of failure. I can’t tell if leverage is supposed to be a good thing if used wisely or a big no no.
First, you will need AT LEAST the used margin amount deposited into your account, and only the amount above that will be available to risk on the trade.
So in your above scenario with 10 lots (it appears you mean 10k minilots), you would need at least a $1000 deposit, and then an additional $300 to cover a 30pip loss. Also don’t forget you start the trade already at a loss because of the spread, which can be as low as 1-3pips on the majors and as high as 6-10pips on the crosses.
And even if you did get that setup (even though at this point you’re depositing way more than the $300 you were thinking), there’s no guarantee your broker will margin call your trade exactly when your free margin gets to Zero. They might just close it out before you expect just to cover their own ass.
Lastly, transferring money can be a very slow process, and you might want to make 2 trades in a row, without waiting days for your money to get there. Just using a stop loss would be much more convenient and versatile. If you’re worried about stop slippage in these markets, I wouldn’t. They are so liquid you will very rarely see a slip at all if your stops are pre-entered (dealing with requotes on market orders is where all hell can break loose). And if you are worried about gaps over the weekend, don’t think your broker will come to rescue you if your trade gaps 100pips against you. Most likely they’d have closed it out before trading closed if they saw how little free margin you had.
Most brokers Don’t margin call at your margin amount. GFT liquidates at 25%
of your margin as if your margin reguirments were 100.00 they would close you at 25.00. I personnally like your idea but not for begginners . It also sounds as if you are just learning , so more demo is needed . Once you are Successfully trading as in making Money ALL THE TIME. That would be the time to use leverage in your favor.
As you learn the style of trading you are going to use you will learn what your maxium drawdown will be at all times, then you could use someting like your talking about to protect your trading funds. Things can happen to even the best traders to cost them more than they thought would ever happen 9/11 as one, stops are slipped and such. Brokers have gone out of bussiness etc… So not having all your eggs in one basket might be perferrable.
But as everyone has stated already leverage is the draw of Forex and also the biggest killer of Newbies. So good luck and struggle on . But at Least you asked that is the start to a successfull Adventure.
Ok, firsts first-different brokers have different terms for the accounts-but let us assume the mini you are referring to is a an account with a lot size of 10k and a pip value of 1 $
Now with 10000 USD you want to exercise that 100:1 leverage, means you will buy 1000,000 USD worth of currency that is 100 mini lots. Now doing that you would have used 2500 out of your 10000 as used margin.
Typically these days the market is highly volatile- May be you have a t/p of 30 pips but then there are wide ranges so let us assume you put a s/l at 30 pips too.
Case1: your t/p is hit–you rake in moolah and your profit is a whopping $130100 = 3000 bucks!!! :eek:
Case 2: S/L is hit-well take the 3000 $ out of your 10000 and now you are left with 7000 USD.
See where I am driving with this? IMHO- I think you should use about 4-10 leverage. So that means just buy a maximum of 100,000 with your 10,000.
It is totally upto you if you can stomach that kind of risk that comes with 100:1
So yes you are right on the bull eye when you say that 10:1 leverage is optimum.
I have been trading from some time now- and have not lost trades as much as I used to. I use 10:1 leverage. If I lose a 100-200 dollars in a trade it is not difficult for me to make profit or even break even, in a second trade, but had I lost a 1000-2000 it will become a psychological wall for me
I would agree that was the most confusing of all the lessons! I’m still trying to come up with a MM plan as well so struggling with the same issues. Good question!
Awesome! I think I’m beginning to understand a bit of the logic now!
One thing I didn’t quite understand:
Now with 10000 USD you want to exercise that 100:1 leverage, means you will buy 1000,000 USD worth of currency that is 100 mini lots. Now doing that you would have used 2500 out of your 10000 as used margin.
If you bought 1,000,000 USD worth of currency which is 100 mini lots on a 100:1 leverage, then wouldn’t you be putting the full 10,000 USD into used margin? (100 minilots x $100/minilot) I’m not understanding how only $2500 went into used margin… unless you meant by using a 400:1 leverage?
Also another question. When using leverage and putting money into used margin, that used margin never gets touched even though you get a margin call right? The only money you will lose is from your usable margin?
To you second question- the used margin will not be touched-thats true. But as in the example I provided, you have 7500 left as usable margin, so you will get a margin call when the trade moves against you in such a way that the 7500 you have cannot support your open positions. In tis case you will get a margin call approx when the position moves againt you by about 75 pips (75X100)…AND since you have a 100 lots open you will have lost 7500 $$$.
To the first part, I was just assuming that your broker offfers one mini lot at $25
I think I’m really starting to understand the math behind the system now thanks to you guys. My newbie days are coming to an end… I wish
One last thing:
How does the spread get counted into the trade? For example, say I bought the 10 minilots with $1000 and have an additional $300 to cover the 30pip loss. If the spread were 5 pips, would that mean that as soon as I buy the 10 minilots, I would already be down $50 in my usable margin? (5pips x 10lots) which would end up giving me only $250 to cover a 25 pip loss instead of 30 pips? and if I’m right, does this stuff show up clearly on the trading platform?
I know I should just go out and demo trade to learn all this stuff (which I plan to do this coming week) but I want to clear some of these thoughts and confusion before I really dive into the hands on stuff.
so many people have so many diffrent ways of explaining leverage it get bloody confusing
here we go
depending on what leverade you use (in my opinion less the better)
lets say you have 100:1
i look at it like this
for every �1 or $1 the broker will lend you 100 times the amount
if you have
$100 you can control a $10,000 trade
400:1
you would only need $25 to control the same amount
now
10k lot is one full lot which looks like this (1.0)
mini lots look like this
0.1 lot = �1000
margin calls usrually kick in around when 80% of the total value of your account has been used
so if you had $300 and your trade went against you at 80 % loss which is $240 your trade should dissapear and you should be left with $60
take in mind if it is a real busy period and your margin call fails and the market falls thought the floor your margin call ant garanteed either just like stop looses
i had 1 account go to -�90 before the boker called it
thats what they mean by you can loose more than you invest
nothing is gauranteed in forex
if you start with $300 you only have $260 of playable money before the trade get kicked (atleast in normal conditions)
so if you were playing $1 per point thats 260 pips before the trade goes south
if you were trading $10 per pip that only 26 pips before the trade goes south
your stratergy of sticking in $300 every time you blow your account just because thats the most you belive you can loose just plane silly
$300 down the drain
also lets say if you win what happens then do you keep risking the full amount or take $300 out evey time you reach that amount
All these calculations seem quite confusing… but in the end, I don’t see any difference in you opening an account with $300 and then (if I read right) you are trading almost 100% of your account on each transaction… which is the same as if you opened with 10k and are making trades with 9k ?!
How about opening with $500 and making standard trades of around $25… which is 5%… and would last you for a while depending on how well your system is working…
