Do you have to trade with margin?

[phil838]

Doesn’t high leverage + low risk (2%) = having to have tight stop losses? Wouldn’t this approach simply cause me to simply lose money by getting stopped out sooner the higher my leverage is?

where 1:1 would allow my trades room to breath right?

Nope, you’re still confusing leverage with the dollar amount you’re trading, they’re not the same. Here’s an example…

Say you’re entering a trade on Oanda so you’re using their units instead of lots, and your leverage is 10:1. You set up your trade, decide what you want your stop loss, target profit, etc to be. You trade 1000 units which has a trade value of $1534 (I made that up, doesn’t really matter what the trade value is).

Now let’s say you have 100:1 leverage, and want to make the same trade. You do the exact same thing! Everything is the same, you are still trading 1000 units for $1534. Your stop loss, take profit, and everything else are exactly the same. The higher leverage just means you [I]can[/I] trade more units, it doesn’t mean you [I]must[/I] trade more.

Think of it like a credit card. Higher leverage equals a higher credit limit. If you buy something for $100 it doesn’t matter if you have a credit limit of $100 (1:1 ratio) or $5000 (50:1 ratio), you’ve still only spent $100. The higher credit limit is only dangerous if you go and max out your card.

It begs the question though how do you choose your stop loss? The 50# in the equation.

That’s depends on your trading system, I just picked 50 cause it’s the first number that popped into my head.

P.S. thank you for sharing information with me as I learn, I appreciate it.

No problem, I’m glad to help!

[ThePhoenix]

Nope, you’re still confusing leverage with the dollar amount you’re trading, they’re not the same. Here’s an example…

Say you’re entering a trade on Oanda so you’re using their units instead of lots, and your leverage is 10:1. You set up your trade, decide what you want your stop loss, target profit, etc to be. You trade 1000 units which has a trade value of $1534 (I made that up, doesn’t really matter what the trade value is).

Now let’s say you have 100:1 leverage, and want to make the same trade. You do the exact same thing! Everything is the same, you are still trading 1000 units for $1534. Your stop loss, take profit, and everything else are exactly the same. The higher leverage just means you [I]can[/I] trade more units, it doesn’t mean you [I]must[/I] trade more.

Think of it like a credit card. Higher leverage equals a higher credit limit. If you buy something for $100 it doesn’t matter if you have a credit limit of $100 (1:1 ratio) or $5000 (50:1 ratio), you’ve still only spent $100. The higher credit limit is only dangerous if you go and max out your card.

That’s depends on your trading system, I just picked 50 cause it’s the first number that popped into my head.

No problem, I’m glad to help!

Ok, so as far as the leverage, I will only end up amplifying my loss/wins if use available leverage and buy more lots than I could with 1:1 ratio? Like doing something stupid and going a 100:1 and buying a full lot?

So, it’s not the leverage it’self that can get you in trouble, but if you choose to use a lot of leverage and borrow more much more than is in your actual account as the drawn down of even a slight move could equal the margin needed to hold the position, and then cause a margin call? Right that’s what you are getting at?

[phil838]

Ok, so as far as the leverage, I will only end up amplifying my loss/wins if use available leverage and buy more lots than I could with 1:1 ratio? Like doing something stupid and going a 100:1 and buying a full lot?

You’re almost there! You’re right, except in order to make money you need to use more than a 1:1 ratio. 50:1 or even 100:1 is not high leverage, it’s normal leverage! Buying a full lot at 100:1 is fine, as long as you have an account that’s large enough for that.

So, it’s not the leverage it’self that can get you in trouble, but if you choose to use a lot of leverage and borrow more much more than is in your actual account as the drawn down of even a slight move could equal the margin needed to hold the position, and then cause a margin call?

That’s right, except for the part about borrowing more than is in your account. I trade more money than is in my account all the time, and it’s not the least bit risky. Forex is not like other markets, borrowing via leverage is a normal part of trading. If you have a $1000 account, and you’re trading a position with $10,000 using leverage that’s ok. Remember that a pip is equal to a tiny fraction of a penny per dollar traded!! If you didn’t use leverage to trade large amounts you could never make any profit.

Here’s an example of a good and a bad trade that might help you understand.

You use your 400:1 leverage on your $1000 account and trade 3 standard lots (worth a total of 300k) with a 25 pip stop loss. That takes $750 in margin, leaving you $250 to work with. At 3 lots your looking at $30 per pip, so if your trade goes down 9 pips you’ll get a margin call way before you hit your stop loss! This is a bad trade caused by overtrading with leverage.

Next say you use your 400:1 leverage on your $1000 account and trade 5 micro lots (worth a total of $5000) That takes $12.50 in margin, leaving you $987.50 to work with. At 5 micro lots your looking at $0.50 per pip, so your trade can go down almost 2000 pips before you’ll get a margin call! Your stop loss should be WAY closer than 2000 pips so this is a good, safe trade, even though you used leverage to trade more money than you had.

I’m really tired and probably got some of the math wrong in my examples, if so don’t let it confuse you. Just realize that the second trade was traded on a high leverage account, and the amount traded was 5 times the account size, yet it was a safe trade.

[ThePhoenix]

You’re almost there! You’re right, except in order to make money you need to use more than a 1:1 ratio. 50:1 or even 100:1 is not high leverage, it’s normal leverage! Buying a full lot at 100:1 is fine, as long as you have an account that’s large enough for that.

That’s right, except for the part about borrowing more than is in your account. I trade more money than is in my account all the time, and it’s not the least bit risky. Forex is not like other markets, borrowing via leverage is a normal part of trading. If you have a $1000 account, and you’re trading a position with $10,000 using leverage that’s ok. Remember that a pip is equal to a tiny fraction of a penny per dollar traded!! If you didn’t use leverage to trade large amounts you could never make any profit.

Here’s an example of a good and a bad trade that might help you understand.

You use your 400:1 leverage on your $1000 account and trade 3 standard lots (worth a total of 300k) with a 25 pip stop loss. That takes $750 in margin, leaving you $250 to work with. At 3 lots your looking at $30 per pip, so if your trade goes down 9 pips you’ll get a margin call way before you hit your stop loss! This is a bad trade caused by overtrading with leverage.

Next say you use your 400:1 leverage on your $1000 account and trade 5 micro lots (worth a total of $5000) That takes $12.50 in margin, leaving you $987.50 to work with. At 5 micro lots your looking at $0.50 per pip, so your trade can go down almost 2000 pips before you’ll get a margin call! Your stop loss should be WAY closer than 2000 pips so this is a good, safe trade, even though you used leverage to trade more money than you had.

I’m really tired and probably got some of the math wrong in my examples, if so don’t let it confuse you. Just realize that the second trade was traded on a high leverage account, and the amount traded was 5 times the account size, yet it was a safe trade.

Thanks so much for the help thus far. When you get the time could you please post some examples of good trade/bad trade as it relates to leverage and margin?

P.S. are you full time trader? If so do you do it for a living. Just want to get a hint of who I’m getting advice from in this thread.

[phil838]

P.S. are you full time trader? If so do you do it for a living. Just want to get a hint of who I’m getting advice from in this thread.

I started trading full-time about 6 months ago. I don’t yet make a full-time salary at it, but only because I had a small amount of money to start with. My wife works full-time to pay the bills and all my earning go towards building up my account balance. I’ve doubled my account 3 times since I started so I’m on my way to actually being able to spend some of my money!

[tymen1]

To [B]ThePhoenix [/B];

When you have got a handle on the things that [B]phil838[/B] is trying to help you with, you can then look at this simple formula I devised…

The only thing I wish to contribute my teaching skills to give readers a simple formula for [U]calculating lots to trade[/U].

The formula is L/l.

The letter “L” stands for loss!!

The little " l " also stands for loss.

So it is an easy formula to remember.

The formula expanded is Loss ($)/loss (pips).

Here is an example to show how it works…

1. Lets say you have a trading capital of $10,000

2. Lets say you want to risk 2% of your capital.

3. 2% of $10,000 is $200

4. Lets say your trade (PCI stop loss) is risking 25 pips.

5. Now apply the formula…L($)/l(pips) = $200/25 = 8

6. 8 what?
   That is $8/pip.

7. Check your accounts.
   A standard lot is $10/pip…this is too much.
   A mini lot is $1/pip.

8. You can, therefore, trade 8x1 minilots = $8/pip as required.

[B]You may want to print this page and keep it for reference.[/B]

[Caesar95]

To tymen1,

May I ask, I was wondering, the virtual capital provided by Forex brokers for practice accounts, let’s say the opening balance of a fresh practice a/c shows that I have “$10,000”, so is this a after leverage or before leverage sum?

~Noob

[phil838]

let’s say the opening balance of a fresh practice a/c shows that I have “$10,000”, so is this a after leverage or before leverage sum?

That’s before leverage. If it was a real account that’s the money you actually have and could withdraw from the account.

[ThePhoenix]

I started trading full-time about 6 months ago. I don’t yet make a full-time salary at it, but only because I had a small amount of money to start with. My wife works full-time to pay the bills and all my earning go towards building up my account balance. I’ve doubled my account 3 times since I started so I’m on my way to actually being able to spend some of my money!

What kind of trader would you say you are phil? I’m leaning towards candlesticks and support resistance and a hourly charts, so I’m going to give nickb’s method a good go and see how I like it. Tymens candlestick strat looks good too, but it seems it’s more for scalping.

[ThePhoenix]

Have you gotten to the section of the Babypips school about money management yet? Your error is that you’re trying to use leverage as a money management system to manage your risk/reward, and that just won’t work.

Not true. What you mean is that you CAN choose to up your wins and losses. If I changed my leverage it would not change the amount of money I trade, because I trade a set percentage of my account per trade.

Leverage only amplifies things because it lets you trade a higher percentage of your account. If you don’t fall for this trick then you’re fine.

Sort of, but my leverage never enters the calculation. My brokers software uses it when I enter a lot/unit size, of course, but it makes no difference to me. When I enter a trade the most I’m willing to lose is 2% of my account. So if I have $1000 I want to lose a max of $20. I then divide my max loss by my stop loss, which is 20/50=.40. So I know I need to trade $.40 per pip. I then enter whatever amount of units equals 40 cents per pip and I enter the trade. I have no clue what the real leverage is for this trade because I don’t need to know.

That’s incorrect. If you risk $20 on a trade at 1:1 leverage it’s the same as risking $20 on 400:1 leverage. The only difference is that you’d need to enter a different unit size to make that $20 trade, but 20 is 20 no matter the leverage.

So, correct me if my thinking is wrong. As long as you figure your own risk % per trade all the broker set leverage is doing is requireing less or more in your margin account to cover the trade? So, just make sure you are well covered so you don’t accidently get a margin call because of high broker leverage and a small account?

[ThePhoenix]

To [B]ThePhoenix [/B];

When you have got a handle on the things that [B]phil838[/B] is trying to help you with, you can then look at this simple formula I devised…

The only thing I wish to contribute my teaching skills to give readers a simple formula for [U]calculating lots to trade[/U].

The formula is L/l.

The letter “L” stands for loss!!

The little " l " also stands for loss.

So it is an easy formula to remember.

The formula expanded is Loss ($)/loss (pips).

Here is an example to show how it works…

1. Lets say you have a trading capital of $10,000

2. Lets say you want to risk 2% of your capital.

3. 2% of $10,000 is $200

4. Lets say your trade (PCI stop loss) is risking 25 pips.

5. Now apply the formula…L($)/l(pips) = $200/25 = 8

6. 8 what?
   That is $8/pip.

7. Check your accounts.
   A standard lot is $10/pip…this is too much.
   A mini lot is $1/pip.

8. You can, therefore, trade 8x1 minilots = $8/pip as required.

[B]You may want to print this page and keep it for reference.[/B]

Thanks So much tymen and phil. I think I now properly understand how to figure risk percentage, and only risking that amount per trade, regardless of the broker leverage.

Now the next step. How do I plug this into risk reward ratio? Say I was using a system that has won x percentage out of 100%.

P.S. I guess the lot requirements is one of the reasons so many people like oanda as a broker, they make risk management easier by letting you buy in odd lots.

[phil838]

Now the next step. How do I plug this into risk reward ratio? Say I was using a system that has won x percentage out of 100%.

The risk management we’ve been talking about is a step to keep you from losing money, but a good risk/reward ratio is what ensures you [I]make[/I] money.

You want to make sure your wins are more than your loses. Say you only win 40% of your trades. You’d be losing money, right? Not necessarily! If your risk/reward ratio was 3:1 you would be making money. If you risk $50 on each trade, but make $100 on the wins then after ten trades you would have lost $300, but won $400, for a net gain of $100.

But what if your system wins 80% of the time, does it still need to have a large win/loss ratio? Nope. You could actually have a system with a negative ratio and still come out profitable. If you win 80% of the time, and risk $100 to make $50 you would have a net gain of $200 for every ten trades. This is actually closer to the way I trade.

[ThePhoenix]

The risk management we’ve been talking about is a step to keep you from losing money, but a good risk/reward ratio is what ensures you [I]make[/I] money.

You want to make sure your wins are more than your loses. Say you only win 40% of your trades. You’d be losing money, right? Not necessarily! If your risk/reward ratio was 3:1 you would be making money. If you risk $50 on each trade, but make $100 on the wins then after ten trades you would have lost $300, but won $400, for a net gain of $100.

But what if your system wins 80% of the time, does it still need to have a large win/loss ratio? Nope. You could actually have a system with a negative ratio and still come out profitable. If you win 80% of the time, and risk $100 to make $50 you would have a net gain of $200 for every ten trades. This is actually closer to the way I trade.

Very enlightening. Thank you sensei, I mean that with no sarcasm. So, what would be a calculation I could use to put it all together, as far as risking % on my whole account/ stop loss/ risk ratio?

[phil838]

So, what would be a calculation I could use to put it all together, as far as risking % on my whole account/ stop loss/ risk ratio?

There really isn’t a single calculation, more of a process. You can’t use risk/reward ratios to set up or predict what you should do on trades, you simply use them to make sure your trades are going to be profitable in the long run.

Your charts (or trading system) should be telling you what your stop loss and take profit values are going to be, then you should use risk/reward to determine if you should even take that trade. Just don’t try and force the trade to conform to your risk/reward ratios or you will lose!

What you should do is find a trading system you like (I recommend the NickB method or the Cowabunga system, both can both be found here on Babypips), then trade them on a demo account for a few weeks. Use proper money management on each trade, but don’t really worry about the risk/reward ratio yet. Keep records and after a few weeks go back and figure up the risk/reward ratio of each trade, and your win/lose precentage. Then you can start to see if you’re doing well on that system.

[ThePhoenix]

Ok, thanks. Makes sense. I’m leaning towards nickb’s method as I don’t really care for indicators, they seem to arbitrary because you can set them up radically different. And I like candlestick.

Though about his method, I’m not sure if he looks for classic patterns or just a series of downtrending candles and a reversal sign and the actual pattern doens’t matter.

Guess I’ll have to read his book a couple more times and ask over on his blog if I still don’t get it.

[phil838]

Guess I’ll have to read his book a couple more times and ask over on his blog if I still don’t get it.

Nick also operates a chatroom over at his website, forex4noobs.com. There are usually at least 20 people in there that use Nick’s method. They’re a GREAT resource if you have questions.