First off, let me introduce myself…I’m Mike West and I’m new here to the site and forums. Well I just finished the school and I have no problem understanding the indicators and how they work, nor do i have any issues with fundamental analysis. My issue lies in leverage and the recommendations the lessons have made. In one of the lessons it’s stated that high levels of leverage should be avoided, due to the inherent risk. But, in the lesson about money management an example is given in which the account balance is 20,000 and 400 dollars is used to control a mini lot…25:1 if I’m right? The lesson says that this is done because you should never use more than 2% of your account on a trade…now my question is, isn’t this a contradiction? And how often do some of you more experienced traders use leverage and to what extent? Thanks to all…I don’t know if I’m over-analyzing here and missing a simple fact, but any help would be appreciated…
The lesson which talks about high leverage mentions 400:1.
25:1 is not high leverage, ok higher than I use at 20:1, but not high.
The problem is with undercapitalisation & high leverage inexperienced
traders become blaise, not realising the damage it can do.
PS Welcome to babypips forums.
Mike,
I do not know if this will help you or not. I have been using a demo account for about one year while I have been saving money for my account. Money I can play with and not care if I lose it some how. I actually keep a file on different things I have learned and have one on leverage so I cut a small piece of it out to post for you…
Leverage Amounts for Mini-accounts
1 mini lot = $10,000
1 PIP = 1/10,000 of a dollar or $.01 (a cent)
So a 1 PIP move = $1/10,000 x $10,000 = $1/PIP
On a $10,000 mini lot 1:1 = $10,000/lot
2:1 = $5,000/lot
5:1 = $2,000/lot
10:1 = $1,000/lot
50:1 = $200/lot
100:1 = $100/lot
200:1 = $50/lot
400:1 = $25/lot
If you bought $400 on the USD/JPY, 2 lots @ 50:1 and 16 lots @ 400:1, and it went against you by 35 pips. You would be down $70 on the 50:1 account, but would be down $280 on the 400:1 account.
This means you would have lost 17.5% on the 50:1 and 70% on the 400:1.
I will be opening my account this week since I now have some extra cash and feel very comfortable in the knowledge I have gained studying during the past year.
Hope this helps you out. Good luck in all you do…
I’m seeing a lot of newbies who are confusing leverage and money management risk.
Leverage has nothing to do with pip value or your account size. You can have the same leverage on a mini account as you do on a standard account. It’s up to your broker what they offer.
Leverage is like a loan that is used to buy/sell lots. With 100:1 leverage, you only need to put up 1% of the value of a lot, thereby borrowing 99% from your broker.
Money management risk is discussed to control how much of your account you will use to buy/sell lots. Risking 2% of your account as a general rule means that you would need to calculate how many lots you can buy/sell. If you have a $10,000 account, it will cost you $100 to buy/sell one mini lot, or $1,000 to buy one standard lot. That is 1% risk and 10% risk, respectively.
A mini lot is 10,000 units of currency. If you’re trading USD, then a mini lot would be $10,000. With [B][I]leverage[/I] of 100:1[/B], you would use $100 to control 1 mini lot. I didn’t look at the lesson in question, but with these figures, $400 would control 4 mini lots.
That $400 is [I]only 2%[/I] of a $20,000 account, so your [B][I]risk[/I][/B] is in line with what they’re saying for good money management.
Most retail traders use leverage, anywhere from 20:1 to 400:1. As daydreamer said, though, many people get carried away with high leverage and buy a lot more than they should. Then, when things go against them, they lose their money very quickly.
The big boys often don’t use any leverage at all. Of course, you need a good size account to do that.
I wouldn’t go any higher than 100:1 to be safe.
Again, leverage has nothing to do with pip value or lot size. It’s simply what percentage you must have to buy/sell a lot.
Your leverage figures are correct, in that it would cost you $1,000 to buy a mini lot at 10:1 leverage, $100 at 100:1, $25 at 400:1, etc.
This is where the problem comes in when people use higher leverage. Just because it only costs you $25 to buy a lot at 400:1 leverage, that doesn’t mean that you should buy more lots! That’s a quick way to lose your whole account, and the main reason why lower leverage is recommended.
Had someone using 400:1 leverage simply bought 2 lots as if they were using 50:1 leverage, it would cost them a lot less and they would limit their loss to the same $70 as with 50:1.
Thank you for explaining that much more throughly than I did. I believe that should answer Mike’s question.
I should have pointed out the whole just because you have more leverage does not mean you need to dump in more money thing. Good point!!
thanks this helped a lot, but it forced me into another question! HAHA, so for a mini account I know I don’t necessarily need the $10,000 the lessons recommended due to leverage…what would be a good starting amount for a mini account once u begin to trade it live? thanks again for the answers and having patience.
In2Blues:
I HATE to ‘argue’ with a fellow ‘Master Contributor and Member’ BUT I disagree with you on this statement:
Money management risk is discussed to control how much of your account you will use to buy/sell lots. Risking 2% of your account as a general rule means that you would need to calculate how many lots you can buy/sell. If you have a $10,000 account, it will cost you $100 to buy/sell one mini lot, or $1,000 to buy one standard lot. That is 1% risk and 10% risk, respectively.
The reason I am disagreeing with you is because that is how I understood the 1% and 2% (or whatever) rule when I started out and it’s not so (and if I’m wrong I don’t mind being told as much but I know I’m not).
‘Risking’ a percentage of your capital (as per the ‘rules’) equates to ‘how much of my capital am I going to lose if the trade goes against me’ and NOT ‘how much of my capital can I be using at any one time to buy lots’.
In other words: let’s say I had a $10 000 account. You are saying that ‘in keeping’ with the 1% rule (let’s say) I should only, at any given time, be using $100 to trade with. Not so (and believe you me you would spend the rest of your life trying to make money that way. Think about it). ‘Risking’ 1% of your capital means ‘the potential loss that I make on the $100 that I am using to trade with cannot exceed $100’ (if you’re following the 1% rule).
In other words: you could use $5 000 of your capital to trade with i.e. to buy lots which would represent 50% of your capital BUT if your ‘sticking to the rules’ the total ‘potential loss if stopped out’ on that $5 000 that you have used as margin MUST NOT exceed $100 i.e. 1% of your capital. See the difference?
Now THIS is where leverage ‘comes into play’. Using the example above (and I’m not going to use exact figures here but) if you used or ‘margined’ $5 000 (let’s for simplicity sake say on a single lot of EUR/USD) on a highly leveraged account, in order for your ‘risk’ or ‘loss’ to be limited to 1% of your capital, you would probably find that the pair would only have to move a very small amount of pips in order for your stop loss to get hit and your loss of $100 or 1% to be ‘realised’. On an account with very low leverage the pair will be able to move far more in the wrong direction before you get stopped out and ‘realise’ the same 1% loss. In other words: using a highly leveraged account reduces the amount of ‘headroom’ that you have for the pair to move so that you are ‘in keeping’ with your 1% ‘risk rule’. See the difference?
In other words: you COULD have let’s say 30 positions open at any given time and these 30 positions may have ‘cost’ you $1000 in margin BUT if you’re ‘sticking’ to the 1% rule then the ‘potential loss’ on the ‘sum total’ of all the ‘potential losses’ on those 30 positions should not exceed $100 OR if you have 1 open position that ‘cost’ you $1000 in margin then the ‘potential loss’ (i.e. ‘risk’) on that single position should not exceed $100 i.e 1%.
Make sense?
(The main reason that I am ‘correcting’ you is because, after year or slightly more of ‘trading for real’, this ‘penny’ only ‘dropped’ about a week ago would you believe)!!!
Dale, you’re absolutely right. That’s what happens when I come in here when I’m tired. :o
Yes, the risk is really the number of pips you could lose, not the cost to buy/sell the lot(s).
So, if you’re risking 2% of a $20,000 account, then you’re risking $400. On a mini account @ $1/pip, that would be a 400 pip Stop Loss – total. So, if you’re buying two mini lots, then you’d use a 200 pip Stop Loss (200 x 2 lots = 400 pips).
Thanks for pointing that out, Dale.
It’s even more embarrassing because I always point that out to others!
It really depends on what pair you plan on trading, as the Stop Loss depends on how volatile that pair is. For example, a 50 pip Stop Loss could be OK for EUR/USD, but certainly not for GBP/JPY, because the latter moves a lot more than the former and you’d be stopped out very quickly.
I hesitate to make a suggestion because I don’t personally follow the 2% “rule” and, so, disagree with those who say that $10,000 is the minimum you should have for a mini account.
You could also open an account with a broker that offers micro lots (such as Oanda). That way, you wouldn’t need nearly as much money. The pips are “only” worth $0.10, but you’d gain much experience with little risk.
Hey Terry,
No problem. Like I said: it’s taken me over a year for ‘the penny to drop’ and it’s really such a simple thing to understand so I’m quite embarrased to admit it!!! The same thing happened with understanding leverage but once the understanding of the 1% rule ‘dropped’ so did the ‘leverage penny’!!!
Terry,
Sorry - we were ‘overtyping’ each other.
You make another good point about having to have $10 000 minumum of stuff like that.
As I was saying to someone the other day: it’s not the amount of profit that you’re making i.e. in monetary terms that matters, it’s the percentage gain on capital that counts so if you’re only trading with $0.1 pips BUT you are increasing your small capital amount by 50% per day (exagerrated for explanation purposes) then it does not matter that the 50% gain may only equate $5 the fact is that your trades are producing a return of 50% SO if you had $1 000 000 in your trading account that 50% is a WHOLE lot more in monetary terms and then you’re ‘cooking with nuclear power’ but the point is that at that point you obviously know what you’re doing!!!
Again, in agreement with you, it’s far better to open a mini or micro account with REAL money, trade REAL micro lots, make REAL profits, take REAL losses, etc. and learn that way than to open and trade with a $50 000 demo account, make a ‘killing’ with that, open a live account with ‘real live’ money, and then go ‘pearshaped’ in the first five minutes!!! Story of my life!!!
You’re absolutely right, Dale, it’s the percentage that counts. When you look at percentage gains instead of specific monetary values, you get a much better idea of your trade performance.
Also, a lot of people think that micro accounts and $0.10 a pip is useless. I used to be one of them. But, it definitely allows people with less than “ideal” starting capital to go live and experience the market for real. It’s even a good idea for someone who does have a good starting balance to try micro trading at first.
Forex, like any business, has its share of people who aren’t capitalized the way purists think they should be. That doesn’t mean that they shouldn’t be trading or that they don’t deserve to be trading. It simply means that they need to look at other alternatives to getting started. That’s where micro lots come in.
Thanks Terry and Dale…Once looking at the percentage rule as one set out to minimize your losses on a trade it definitely makes sense…and depending on the amount of leverage used, will determine how tight I’ll have to stop out…Also I was looking at various brokers and Dale I saw your recommendations for Delta Trade and I d/l their platform…DO you still have positive words for them?
My pleasure, and yes - still no problems with Delta - and somewhere where I would recommend you start i.e. you can choose your own lot size and ‘get into the game’ for real (you can also preselect your leverage).
I hope I did not confuse you more, Mike. The pip value portion of my post was actually part of my own learning when I first began. But I failed to explain it in the post I put up for you.
I had no idea how much a pip was worth. Since I did not know it’s value I had no idea how much money I could be throwing away with any amount of leverage. Not a good way to go about things.
But I did learn something on this thread I was doing wrong. I was thinking the 2% rule was for money used for buying lots and not for the risk of loss. I wanted to thank dpaterso for pointing that out. I was a bit foggy on that aspect and it never felt right. Thanks again.
depaterso,
I had to read your clarification several times and still don’t comprehend how it is possible to keep the loss to $100 on 30 lots and how low the margin should one utilize to achieve that?
Can you please try ones more with examples of trades in numbers and stops/leverages to show how not to exceed $100 in risk? Is it then that loss in pips for 30 lots can only go to $3.03 per lot? I don’t get it.
Thank you much.
His example wasn’t intended as a suggestion on what you should do, just a comparisson. You’re absolutely correct that 30 contracts to risk only $100 is an extremely difficult prospect. You’d be done for in about 3 pips on a mini EUR/USD contract.
But that brings up an important seperate point. Many traders foolishly figure out how much they want to risk ($100) then take the number of contracts they want to trade (say 10) and figure out their stop (in this case 10 pips for a mini EUR/USD). That’s all backwards.
They should be deciding on the pips they are willing to risk for a given trade (let’s say 20) and multiplying by the pip value ($1/pip for the mini EUR/USD). That gives you risk per contract (20 x $1 = $20). With that you can figure out how many contracts to trade by dividing the total risk you want to take ($100) by the per contract risk ($100/$20 = 5).
thanks rhody that clarified it even more for me…hopefully this thread has helped everyone out
I am currently trading on a 30 min. time frame. what are suitable settings for my EMA and Stochastics charts.
Thanks.
PipSlapWest…
I haven’t read all the responses in their entirety, so if I’m saying something over just skip the post. ;o)
There is a difference between Margin requirement to open a trade and a Stop Loss in Money Management.
Higher leverage will deplete your Margin faster if trade goes against you. The Money Management Rules is just saying how much you should risk on a “given trade”. $10,000 left over after trade is open, you should set your stop loss to equal no more than 100 dollars worth of pip losses on that given trade. The amount of leverage you decide on, will dictate how much pip swing you have before you bust. If your leverage is low enough you can actual have each pip equal .10 cents which can withstand a 1,000 pip loss before margin call or go nuts an have 100 dollars a pip and get a margin call after one pip loss.
Both scenerios still abide the 1% money management rule per trade. Both will lose 100 bux, just at different pip swings.
So in my eyes, it didn’t contradicate each other. Both lessons deal with total opposite things.
Kangi