Sorry for the newbi question, but I’m not sure which numbers to use for calculating the risk.
I have an FXCM demo account that I started with a $2000 balance. Do I use the “Total Used Margin” as the amount to determine my overall risk? If so, I assume I use the “Used Margin” for each pair that is listed on my summary list to determine the “risk per trade”? (like the number that should be 2% or less)
Btw, I’m not using a Stop Loss yet. It seems like the true risk without one would be theoretically unlimited, right?
I’m practicing Swing trading, based on MG99’s thread. He seems MIA, so I can’t ask him. I’m planning to use a “trailing stop loss”, since they are long term trades & I don’t know where to exit some of them yet. I’m thinking I’ll probably set it at about 100 pips, since I’m using the daily charts. ( I guess it should really depend on the average daily range for each specific pair?)
For each trade, risk is determined by the size of your position, the pip-value of the pair you are trading, and the depth of your stop-loss.
To see why this is so, consider three [I]identical trades[/I] in three [I]different accounts.[/I]
Let’s say the trade in this example is:
Long 1 standard lot (100,000 units) of EUR/USD, entered at 1.0600, with a 50-pip stop-loss.
B[/B] in an account requiring 2% margin (corresponding to 50:1 allowable leverage)
B[/B] in an account requiring 0.5% margin (corresponding to 200:1 allowable leverage)
B[/B] in an account requiring 0.1% margin (corresponding to 1000:1 allowable leverage)
In account (1), used margin is $2,120 (that is, 2% of 100,000 units x 1.0600). In account (2), used margin is $530 (that is, 0.5% of 100,000 units x 1.0600). And in account (3), used margin is $106 (that is, 0.1% of 100,000 units x 1.0600).
But, in each case, risk is $500 (that is, 50 pips x $10 per pip per standard lot x 1 standard lot).
True risk, in that case, would be limited by the point at which your account suffers a Margin Call. That’s the point at which your broker automatically closes your position [I]to save you[/I] from a total wipe-out of your balance (or, worse, a negative balance), and [I]to save himself[/I] from having to chase you to collect a negative balance from you.
You should avoid margin calls (by limiting the total risk in all your open positions). And, in order to do that, you need to know exactly how your broker imposes margin calls. Not all brokers are the same in this regard (or in any regard). Read the Terms and Conditions of your account, or ask your broker directly.
MG99 doesn’t use stop-losses in his Portfolio Methodology, but many of the other traders commenting on his thread do use stops. The stop-loss tactics you have described above are reasonable. BUT, if you are a brand-new swing trader, trying to use the MG99 Methodology may be a bad idea. Here is something I wrote on that subject —
Clint,
Thanks for such a detailed reply. I understand the math and how it varies depending on the size of your stop loss.
I don’t really understand the “Used Margin” and “Maintenance Margin Requirement” numbers listed for each pair. The Used Margin is 1/2 of the amount of the MMR.
I read your recommendation about learning to handle a single pair first before trying a portfolio of pairs, and it makes sense. But in my case I’m so unskilled it really feels good to work with a large group of pairs because I mostly picked winners, and the losers were easier to accept. I could watch my totals grow, and discard the negative ones. That’s a psychological boost.
I realize that I still need to learn about risk, how to exit a trade, etc. But since it’s a demo there’s no real risk, and I’d think I can learn a lot from the individual nature of each pair at the same time. If I were to just concentrate on one pair I would have a difficult time choosing the “right” one. I’d also get bored watching only one pair. (That’s why so many newbies like the fast time frames, right?)
I know I have a lot to learn.
Btw, does 100 pips = 1%? If so, of which currency?
As I suggested in my previous post, you need to consult your broker’s published information on margin (and all other aspects of your account). If you can’t find the information you need after a diligent search, call your broker and ask for help.
For your FXCM demo account, try this for starters —
You seem to be saying,
[I]“Yes, I understand the recommendations of traders who have many years of experience.
[B]But, in my case,[/B] these recommendations don’t apply. I know a better way to do things.”[/I]
Someday, if you stick with forex, you’ll re-read your statements above, and laugh at yourself.
We agree.
In every currency pair, [B]100 pips = 1% of the value of 1 unit of the QUOTE currency in that pair.[/B]
Example: suppose that the current price of EUR/USD is 1.0600.
EUR/USD = 1.0600 [U]means[/U] 1 EUR = 1.0600 USD
which, in turn, means that 1 EUR = 10,600 USD pips.
• If the price increases by 1 pip (to 1.0601), that increase equals 1/10000 of $1, or 1/100 of 1% of $1.
• If the price increases by 10 pips (to 1.0610), that increase equals 1/1000 of $1, or 1/10 of 1% of $1.
• If the price increases by [B]100 pips[/B] (to 1.0700), that increase equals 1/100 of $1, or [B]1% of $1.[/B]
Do not confuse [B]1% of the value of 1 unit of the QUOTE currency[/B] with either:
(1) 1% of the price of the pair — which it is [B]NOT[/B], or
(2) 1% risk in your account — which it is [B]NOT[/B].
[I]“Yes, I understand the recommendations of traders who have many years of experience.
[B]But, in my case,[/B] these recommendations don’t apply. I know a better way to do things.”[/I]
Someday, if you stick with forex, you’ll re-read your statements above, and laugh at yourself.
“Someday” came much sooner than I’d expected!! Glad it’s only demo money, so I can afford to laugh. lol
Looks like I should add “Listen to the Forex News” to my list!
My list is getting longer & longer. MG99 sure made it sound easy… (: