I just had a quick question about margin and leverage.
Babypips suggests not trading standard lots until you have $100K in the account.
Now if you only traded 1 standard lot per $100K your true leverage would be 1:1 or as babypips points out…no leverage at all.
Something that attracted me to the FX market in the first place is the leverage available. I simply do not have sufficient capital to trade stocks, futures etc. I wont have a spare $100K with which to trade for about another 30 odd years either! haha
I know leverage is a two edged sword but what do you think would be a fair trade off between safe, conservative leverage(1:1) and something a little more aggressive? I have read in many places that with a well tested system and vigilant money management you should be right with $10K per 1 standard lot.
I definitely disgree with the premise that you need 100k to trade 100k. Actual numbers aside, though, I think the main point being made is that over-trading relative to the size of your account is a fast way to lose that account. You need to have enough in your account to make sure that your risk doesn’t represent an over-large fraction.
I think a good point is that why bother with a standard lot? Personally I won’t be trading a standard lot size until I hit 20,000. So think about this. Say you are trading standard lots right. Say it is 1 standard lot per 10,000, right? You would have to double your account before you increase your lot size! You would be better off going with a mini account so you can progressively increase your lot size while your capital increases. However, this isn’t a problem with Oanda since you can have variable units. You can trade whatever size you want! But I would defiantly not go to a standard account until I had probably around 100,000 and I would be using leverage! It is just that it will take you so long to increase your lot size using a standard lot with starting capital of 10,000.
Even by my own rules of 20,000 per 100,000 lot would mean I would have to increase my account by 20% to increase my lots size. So even with 100,000 capital I would still be trading mini lots!
I agree 100%. Unless you’re a really big trader and a full lot represents a very small position, being able to trade mini/micro lots makes good sense so you can be extremely flexible in your position sizing.
I fully intend to trade mini lots to begin with no matter what size trading fund I end up having.
My question went to the idea that you should not trade above a true leverage of 1:1. This seemed extremely conservative to me. Obviously one doesn’t want to use too much leverage. For example a true leverage of 100:1 is just plain suicidal, especially as a beginner. 50:1 I would say is still too steep.
Assuming one has a tested system, has demo traded it for a number of months, has traded 1 mini lot at a time for a few months and everything is going well, what would be a general idea of the maximum safe “true” leverage one should employ?
I realise in the end it is a personal thing, I’m just seeking a general idea as to what most people who seek to be good traders would think on the subject.
How much leverage you use should be based on the risk you are taking for a given trade. For example, if you’re risking 10 pips on Trade A vs 100 pips on a Trade B, if everything else is the same (timeframe, etc.) then you would be able to employ 10 times as much leverage for Trade A as for Trade B to take the same risk. Always think in terms of risk first, then figure out your position size. Don’t go the other way.
I know i’ve shared this opinion elsewhere in these forums, but i will share it again.
Do not think in terms of leverage. Don’t bother. Leverage is a crucial concept to understand but if you think in terms of percent risk per trade then leverage will take care of itself.
Let’s put it to an example:
You are trading a mini account, with a 20,000 balance. A rule of thumb is to never risk more than 1-3% of your total account on any one trade. So assume you decide to risk 2%. You find a trade for which you want to employ a 40 pip stop. How many contracts must you trade to maintain a 2% risk?
The answer is (20,000 x 2%)/ (1.00/pip)(40 pip stop) = 10 mini contracts
Trading 10 mini contracts means you are controlling $100,000 worth of currency on a $20,000 account. So, 100,000/20,000 = 5:1 is your leverage.
Anything more than this, i think, is pushing it unless you have a highly accurate system that might justify more risk.
Bottom line is to think in terms of a conservative percent risk and your leverage will automatically fall into place.
When we are winning then we also have to be safe as i have seen that many times compounding the winnings leads to loss and i have learned from it the hard way friend:(