Trying to understand leverage and my own expectations

Beginner Questions
1

I’ve been curious about FX trading for three months now, so i’ve been learning on the side and running a demo account on Investopedia for the last month. I tried to set it up how i would expect to do it in real life, so i put it as $1000 and got started demo trading. I kept my trades small and sold each one when it made a profit of $10. I opted to set three trades up at a time and each time one hit the $10 profit I sold it and bought a new one.

A month later i’ve gone from having a margin of $1000 to $2678, which seems far too easy and so now i’m thinking that i must have misunderstood something major between a demo account and a real account. The demo was Investopedia’s $1000 Trading Challenge (no end) and leverage is set as 100:1.

I suppose my question here is how does a demo account compare to actual expectations? Is this a reasonable simulation of what would occur? I look at brokers online and i see that they have leverage of around 200-800:1. Is my leverage being that low leading to an unrealistic result?

I’m still reading through the school stuff at the moment but the practical results of the demo are making it confusing. Any advice would be appreciated.

2

They vary,

Quite often, spreads are higher and sometimes slippage worse on a real, funded account.

Looking at it superficially, it seems unlikely that that would make your trading pattern losing rather than winning, though.

I think Investopedia isn’t a broker, so they’re using someone else’s “feed” of prices, on a demonstration/promotion basis, probably? Do you know whose?

I’m not quite sure exactly what you mean by this?

Your risk parameters are what determines how safe your trading is. The size of your stop-losses and what proportion of your account you’re risking on each trade.

With a $1,000 account, that probably shouldn’t be more than a $10 risk per trade if your stop-loss is hit.

But entering three trades at once, especially if they’re correlated, increases that risk.

It may be that your trading on the demo was “too risky” but we can’t really tell from what you’ve said.

It certainly sounds like you’ve got off to a good start, anyway.

Your 100:1 leverage is high, not low. Don’t think that 100:1 is low leverage. It really isn’t. The brokers offering higher leverage than that (and there are hundreds of them) are trying to attract customers whose risk management parameters are dangerous, because they’re really counterparties, and hoping to win their clients’ money.

1 Like
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I can’t see anything on Investopedia’s site within easy viewing that says who they’re simulating.

So i’m getting really confused about leverage now. Like i said the brokers i see online are showing leverage of 200-400:1 (one shows as 888:1). So are they considered less risky? Because if anything they seem a little more shady (the 888 one looks more like a gambling site).

When i say three trades, i mean i bought three long trades of 10,000 at a time. When one reaches a profit of $10, i sell it, look for another trade that looks low and then buy 10,000 in that. On average it gets bought for around $100. From what you’ve said that’s a risk of roughly 10% rather than 1% so i guess that’s why it’s been going well, but i suppose i’ve been a bit more lucky than anything else. Thanks. I think i understand a bit better now.

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Welcome to BabyPips @Shariku

If you trade long enough, losing trades will come. The key to risk management is to minimize your risk per trade, so that a succession of losing trades does not cripple your ability to take full advantage of the next winning trade. That is why you’ll often read you should look to limit your risk per trade to 2% of your account. With a $1000 starting balance that would be $20 you could risk per trade.

From the rapid doubling of your account, we’re guessing you risked much more than that on the downside. What size trades were you placing?

It seems as if you placed many highly leveraged trades and picked the direction of the trend correctly over the month in question. While this approach can produce extraordinary returns in the short term as you have seen, all it would take is for the trend to reverse on you for a substantial percentage of your account balance to get wiped out, and then it would be very hard to recover.

You may find this earlier discussion on leverage interesting as it addresses the distinction between your effective leverage and the maximum leverage available to you in your account. What is the best leverage?

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Thanks forex.com!

My trades were quantities of 10000, which i now realised were a risk per trade of around 10% so yeah, perhaps a bit too risky for real life. Since i was still feeling my way around the numbers this felt like it a good measure to get profits of $10 on a regular basis. My aim was to get an average of five successful trades a day, but really i was just feeling it ll out while i got used to the whole system.

Some of the trades did go sour, but when that happened i reasoned that if i simply bought the same/doubled quantity of the same trade again i could just wait until the market fluctuated back up and then i could at the very least break even and negate the loss. It worked out whenever that happened.

Had a quick read of the other article, so it’s good to see that 100:1 is a decent starter leverage, but i’m getting confused as to what’s considered high/riskier leverage. Is 200:1 seen as higher, or is the whole thing reversed and 50:1 is actually higher/riskier?

6

As the saying goes “Good luck with that”. :open_mouth:

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[quote=“Shariku, post:1, topic:109131, full:true”]

I’ve been curious about FX trading for three months now, so i’ve been learning on the side and running a demo account on Investopedia for the last month. I tried to set it up how i would expect to do it in real life, so i put it as $1000 and got started demo trading

… The demo was Investopedia’s $1000 Trading Challenge (no end) and leverage is set as 100:1.

… I look at brokers online and i see that they have leverage of around 200-800:1. Is my leverage being that low leading to an unrealistic result?[/quote]

You are confusing

  • the maximum leverage your demo platform will allow with

  • the leverage you are actually using in your trades.

Your platform limits your overall leverage (leverage on all your open trades combined) to 100 times your account balance. That’s what 100:1 leverage means.

Initially, you were actually using 30 times your account balance, when you traded 3 positions of 10,000 units each in your $1,000 demo account. As your balance grew, and you continued to trade the same number of positions and the same position sizes, you were actually using less leverage in each group of trades.

Here’s how that’s figured. For simplicity, let’s assume that all of your trades had the USD as the base currency. In other words, you were trading pairs of the form USD/XXX, where XXX can represent any currency other than USD. Given this assumption, each of your trades had a notional amount of 10,000 units and a notional value of $10,000. Initially, each $10,000 position was 10 times the size of your $1,000 balance. And 3 positions open at the same time represented an exposure of 30 times your (initial) balance.

That is, initially you were actually using 30:1 leverage.

The leverage you were actually using would have been 30:1, regardless of how much maximum leverage your platform allowed you. So, whether your platform limited your leverage to 100:1, or 200:1, or 1000:1, your trades would have worked exactly the same way.

[quote=“Shariku, post:3, topic:109131, full:true”]

I can’t see anything on Investopedia’s site within easy viewing that says who they’re simulating.[/quote]

Here’s a comparison of Friday’s closing prices (bid and ask) for the 10 pairs offered on your Investopedia demo account, with the same pairs (marked with red arrows) on a live Forex.com account:

From the Investopedia demo platform

From the Forex.com platform

Closing prices - 07.21.17 - Forex.com - 1.png344×547 21.2 KB

As you can see, the prices are identical. This means that either (1) Investopedia is getting their price feed from Forex.com, or (2) both are getting their price feeds from the same source.

Bottom line: The prices in your Investopedia demo account appear to reflect the real market.

[quote=“Shariku, post:5, topic:109131, full:true”]

Some of the trades did go sour, but when that happened i reasoned that if i simply bought the same/doubled quantity of the same trade again i could just wait until the market fluctuated back up and then i could at the very least break even and negate the loss. It worked out whenever that happened.[/quote]

Your position sizes (10,000 units) represent (nominally) $10,000 trades, with each pip of profit or loss being worth $1. So, your $10 take-profit point in each trade corresponds to a 10-pip profit in that trade.

You haven’t mentioned using a stop-loss. You have only mentioned doubling-up on your losers, in order to erase losses. Eventually, this strategy is likely to destroy your account.

I knew a guy once who had this fail-safe strategy: He opened every trade with a 10-pip TP and a 100-pip SL, and just let it run until either the TP or the SL was hit. He claimed that natural market fluctuations would always cause the TP to be hit first.

It worked beautifully. Until it stopped working. He blew his account.

Your strategy sounds a little like that.

2 Likes
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Ok, i think i’m getting it now. So the maximum leverage part isn’t a constant affecting all my trades, and my leverage is relative to my trades. Thank you so much.

And yeah, i guess i’m not gonna be doing that double up on my losses thing anymore. It sounds like i just got real lucky as opposed to actually doing well.

Back to learning then!

1 Like
9

Apart from the great explanations in Clint’s posts, that should be your main take-away from the thread, and well done for realizing it.

“Cut losses quickly but let profits run” isn’t a bad general principle at all.

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As @Clint said above, since you had three mini lot (10K) trades open, the total notional value of your open positions was 30K. With 1K in your account, your effective leverage was 30:1.

When you doubled your trade size, your effective leverage doubled to 60:1 and perhaps even more if the market price continued to move against your open positions thereby reducing your account balance. This approach is similar to a gambler betting double-or-nothing each time he loses. It works until it doesn’t. It stops working when your losing streak outlasts your capital. When it stops working you are left with a devastating loss from which it is difficult to recover.

The key point to take away is that when people refer to 200:1 or 50:1, they are most likely referring to the maximum leverage available to you. More important is your effective leverage. That is the ratio between the notional value of your open positions and the actual money you have in your trading account.

The maximum leverage available in your account is kind of like the top speed of your car. The effective leverage you use is like the actual speed you drive. Which is more important to you navigating the street safely?

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I do not want to rush my car ,it will eat all fuel in less time. It is good to trade with low or medium leverage than of highest leverage which is offered to our account. Many people are illustrated by leverage they do not understand the real value of it. It can be an illusion you do not know its side effects.