Leverage and stop loss

Beginner Questions
1

Hi
I am new to forex and have just opened a demo account.
But still concerns that i want to ask, and to decide if this forex is something i want to do.
I have come across stop hunting in my studies were brokers can take out your stops?
You would place stops so that you don’t lose too much money wouldn’t you? So what if the broker took out my stops? Would i be at risk of having my account wiped out? as i work 8 hours a day so wouldn’t know if the broker took out my stops till late at night in which case it might be too late and my account wiped out?

Also about Leverage. I have 5k to use on forex but i don’t like the idea of leverage, do you have to use leverage? as i wouldn’t like to owe any bank or broker anything if it all went horribly wrong. I don’t mind losing the 5k (though would rather not)as i can afford to. But to get into trouble and risk bankrupt or something is a bit to much for me.

How do you find out how much Leverage you are using anyway? I would like to keep a check on it. As knowing my luck i will eventually open a real account and the account will automatically give me high leverage or something and me presuming i have no leverage!

I know i’m probably acting a little paranoid. But just want to make sure i am safe. As i said it’s not the end of the world if i lose the 5k to forex trading. It’s life sometimes. I just don’t want it to start cutting into my money that i need to pay bills and food and stuff.

2

Stop-hunting does not refer to a broker removing your stop, leaving you unprotected. It refers to a market-maker (most likely at the interbank level, not at the broker level) driving price into a cluster of stops, triggering those stops.

This is a profitable venture for the market-maker.

For traders who are victimized in this way, stop-hunting causes losses, or reduces profits on open positions.

Stop-hunting does not result in the total wipe-out of accounts.

There is only the slightest chance that you could end up owing a [B]broker[/B] money, beyond what you have in your account. It would probably take extremely dire circumstances — something on the order of the whole forex market seizing up — for you to end up “owing” your broker money.

The misuse of leverage could cost you [B]almost all[/B] the money in your account, but it won’t put you in the position of owing your broker money.

If your comment about a bank refers to [B]the bank which provides liquidity to your broker,[/B] there is zero chance that you could end up owing [B]that bank[/B] any money — you have no relationship with that bank, no dealings with that bank, and no obligations to that bank.

[B]If your broker happens to be a bank[/B] (dbfx, MIG bank, etc.) then the first sentence in this paragraph applies to that broker/bank.

[B]Bad attitude.[/B] Do NOT open a live trading account until you have corrected that attitude (and learned a LOT more about forex trading).

Someone has said that the most important aspect of money management is not how much money you make — it’s how much money you don’t lose. Which is a catchy way of saying that preservation of capital is job 1.

I promise you that if you go into the market with 5k and the attitude that you don’t mind losing it, you WILL lose it.

You determine how much leverage you will use on every trade. It’s your choice, up to the maximum limit set by your broker.

Think of a credit limit on a credit card. If your credit provider gives you a credit-line of $100,000, do you panic at having so much debt? Probably not. You know that how much debt you incur is up to you. If you foolishly take on too much debt, just because your credit-card company offered you a huge amount of credit, well, get ready to face the consequences.

Likewise, if you use too much of the leverage offered to you by your broker, get ready to face the consequences.

No, you just have a lot to learn. Keep that 5k in a safe place, until you have learned the basic workings of this market, and learned how to trade.

3

The leverage you’re actually using can be calculated by dividing the value of your position (note I said value, not size as they can be different) by your account balance. For example, if you’re trading 1000 EUR/USD at 1.4 (thus a value of $1400), and you have a $5000 account then your employed leverage is 0.28 ($1400/$5000).

But you really shouldn’t be focused on leverage. You should focus on what you’re risking on a per trade basis.

4

Thanks for the help. It has cleared up alot of concerns i have had, thanks

5

By the way, let me also tell you that by using leverage, you are not exposed to the risk of having to owe anything to the broker in case of loss. They take that risk for you.

6

There are two types of stop orders - normal stop orders which are offered by the providers free of charge and guaranteed stop loss orders (aka as controlled risk bets) where you are charged a little bit extra in the form of a wider bid-offer spread but the stop loss level is guaranteed. Although the spread betting company will try to close your bet at your stop order on a best execution basis, in some cases you may still be closed out at a price higher or lower than your stop. This is because in fast moving markets shares, indices or commodities can gap meaning that the price moves to quickly. With guaranteed stop loss order gapping doesn’t happen, the provider ‘guarantees’ the level at which you will be stopped out and this is why you are charged a premium for it.

7

You might want to go back to school. This is wishful thinking.

8

What? Which broker charges you for negative account balances?

As far as I know that is the only way where you are really in debt with your broker.

9

I think its the way you just came out with an over the top fact about leverage. You suggested that by using leverage you can dismiss the theory of owing a broker money, however, of course you will still owe them money if your account runs into negative! Its not free money.

Its the way you wrote your answer, it should read like this: “you are exposed to the risk of having to owe your broker in case of loss with or without the use of leverage”

JB

10

But what I mean, is just that it has been of my experience, to see brokers not charging or enforcing the payment of negative balance accounts.

11

As always with brokers, you need to check their fine print. Under normal conditions the automatic position closure on margin call will prevent a negative equity situation, but there’s always the chance that some weekend gap type of thing takes an account negative. If the broker doesn’t explicitly state losses will be limited the trader is responsible.

12

I know at least 2 brokers that explicitly state in “fine print” that they WILL NOT charge for them.

And even will reset the balances to 0.00.

13

Hi, friends…What is StopLoss and TakeProfit?