Hi, Im a newbie at trading forex and just recently finished the school of pipsology’s section on leverage. Have to confess i am totally lost …
I am currently using the swing trading method suggested by the author on forex.com’s trial platform, starting with fake capital of 50,000. Below is my question:
Today, I just bought 1 standard lot of USD/CHF at 1.08012 using a leverage of 1:100. (so guess that means i spent 1080.12 of my account) My question is this … what would happen if the price moves 1% against me, ie from 1.08012 to 1.0693? According to the article, does that mean that i lose 100% of my original 1080.12? And what happens if it moves more than 1% against me — does that mean i have to fork out more than more my orginal investment of 1080.12 to pay for the loss?
Also hypothetically speaking, what if the price falls 50% in one day – does that mean my entire 50,000 account is wiped out ?
If anyone can enlighten me, i would really appreciate it, thanks a lot.
If USD/CHF dropped from 1.08012 to 1.06930 that would be a loss of 108.2 pips. Current pip value for USD/CHF is about $9.24 for a standard lot of 100,000.
The total loss on that trade would be $999.77 ($9.24 X 108.2 pips)
The margin requirement of $1,080.12 is not the maximum amount you could lose on that trade. That is simply what you set aside to open the trade. Out of your $50,000 starting amount, you set aside $1,080.12 as the margin requirement and you have $48,919.88 in free margin. Your losses on the USD/CHF position decrease your free margin.
I find that talking about leverage in terms of 100:1, 200:1 etc a little deceiving sometimes because it’s really determining what amount of your initial position you set aside as the margin requirement. You have leveraged your $1,080 one hundred times to trade a notional amount of 100,000 USD/CHF. If USD/CHF drops 1% it does not mean your $50,000 balance drops 100%. Only if you leveraged your entire account of $50,000 100 times would your account value drop to 0 if the market moved 1% against you.
I like to think of this in terms of effective leverage. You have effectively leveraged your account 2 times. Here’s why. You are trading a 100,000 position with a balance of $50,000 (100,000 / $50,000 = 2). You are trading a position twice the size of your account. When the market moved 1% against you creating a loss of $999.77, it became a -2% return on your account ($999.77 / $50,000 = -2%).
Hi Jason, thanks a lot … that clears up quite a bit of confusion.
It seems to me like leverage can really magnify your losses … losing 2% of entire account on 1 small trade isnt cool. I think i’ll stick with the 30 pip stop loss system for now.
Was just wondering: The article in school of pips said that most professionals use leverage of 5:1, is that true? Also, it seems like the minimum leverage for forex.com is 100:1 as stated on its website … do you know of any brokers which can give low leverages like 5:1 ?
Using a max of 5:1 leverage is probably a good idea. I’ve heard up to 10:1 but even that may get the heart racing. Think of it this way, if the market drops 1% and you are leveraged 5 times, are you willing to lose 5%? Decide what your risk tolerance is first (how much you are willing to lose), and then use that to determine your trade size in relation to your account balance.
Even if 100:1 leverage is offered, it doesn’t mean you are automatically leveraging your account 100 times. In my previous post, the example I gave effectively leveraged your account 2 times. In that case, 100:1 leverage simply means you set aside 1% ( or 1/100th) of the position size you traded as margin requirement.
Hey there,
Just a noobie here but I was wondering what’s stopping me if I do my homework and wait for a good time to enter with my $50,000 savings and just leverage 2:1 and set my profit goal at 150-250pips I could just let it sit there(weeks,months…) until I profit right?
I mean the market would have to lose impossible amounts of % for me to lose my entire savings or for my broker places a margin call on me. Effectively I enter at extremely tiny risk, potentially no short-term gain but more certain long term gains(beats interest at banks).
Or after a while do brokers just give up on you and margin call you anyway? Or do losses secretly accumulate monthly?
Ahh yes … i knew there was something wrong with my logic … so as long as your total open positions are not more than 5 times your account size, u should be pretty ok i guess ?
Actually, a standard lot of USD/CHF has a value of $100,000. Remember, the position size is based on the first (base) currency. Thus, your margin at 100:1 leverage is $1000, not $1080.12.
There is, of course, nothing stopping you doing that, but there are some things to consider.
If you’re trading a negative carry position you will be losing money the whole time you’re in the position.
In something like EUR/USD you’re proposed profit objective of 150-250 is only a 3%-5% gain on your account ($10/pip for full lot position).
Take a look at long-term charts an see how long you may have to ride out a drawdown - assuming the market ever comes back to your entry point. For example, USD/JPY hasn’t revisted 200 since it broke that level back in 1986.
Consider #2 and #3 together and see whether the potentially paltry return is worth the risk and time span associated.
An update on the system recommended in the school of pips i am currently testing:
Today, the market moved against my position (2 lots of USD/CHF at 1.0812) and i was stopped out at the 30 pips stop loss for a loss of 556 USD … about 1.1% of 50,000) … This feels painful althought it is fake capital … never loss 500 quid in 1 day before
Anyone has tries this before and tested its accuracy ?
Trading Rules
�Stop Loss = 30 pips
�Entry Rules
1.Enter long if:
◦The 5 EMA crosses above the 10 EMA and both stochastic lines are heading up (do not enter if the stochastic lines are already in the overbought territory)
◦RSI is greater than 50
2.Enter short if:
◦The 5 EMA crosses below the 10 EMA and both stochastic lines are heading down AND (do not enter if the stochastic lines are already in oversold territory)
◦RSI is less than 50
�Exit Rules
�Exit when the 5 EMA crosses the 10 EMA in the opposite direction of your trade OR if RSI crosses back to 50
Hey, thanks for replying! This place seems helpful, will probably stick around for a while
But could someone/you explain what’s meant by losing money the whole time. Interest? Opportunity cost? Or do you mean simply a smaller figure in my account balance than what I started with? Or smthing I’m not aware of.
Because the profits/losses are only calculated once I close if i’m not mistaken.
You’ll want to read up about carry. The short answer is that if you’re long a lower interest paying currency than the one you’re short you will be in a negative interest position, meaning daily net interest withdrawls.
Because the profits/losses are only calculated once I close if i’m not mistaken.
No. Forex is a continuous market-to-market. Your account will always reflect the value of open positions.
If the loss amount is too much to bear, it may be best to go with mini lots (10,000) or micro lots (1,000), rather than using standard lots. Reducing the the lot size will decrease how much each pip is worth.
