Money management and leverage

thread: Money management and leverage

  1. #1
    Junior Member Medusas's Avatar
    25

    Money management and leverage

    I could not post in Money control thread, unfortunately it is closed. So I needed to open a new one.

    I'll be very grateful if someone could make thing clear to me.

    I have $5000 demo account with 200:1 leverage. Question is: what size lot I can exchange if I want to risk 2%?

    2% of my deposit is $100.00
    If I wish to set a stop 20 pips = $100/20=$5 pip Right?

    And then I have lost. What do I do next? Does it mean I can exchange half of a standard lot? Regular lot is 100.000, so I can exchange 50.000 lot?
    How to apply 200:1 leverage for this calculation?

    Thank you very much for Assistance

  2. #2
    I couldn't post in Money control thread, sadly it is closed. I had to open a new one.

    I will be very grateful if someone could make thing clear to me.

    I have $5000 demo account with 200:1 leverage. Question is: what size lot I can exchange if I want to risk 2%?

    2% of my deposit is $100.00
    If I wish to specify a stop 20 pips = $100/20=5 pip Right?

    And I got lost. What do I do next? Does this mean that I can exchange half of a normal lot? Normal lot is 100.000, so I can exchange 50.000 lot?
    How to use 200:1 leverage to this calculation?

    Thank you very much for assistance
    It depends on what lot size you are trading: regular, miniature or micro

    To get a normal lot each pip is worth $10
    $10 days 20 pips = $200
    $50 divided by $200 =
    0.25 normal lots or
    2.5 miniature lots or
    25 micro lots

    In each case, the position size = $25,000

    200:1 leverage will be the max your broker provides. The only advantage this offers you will be a lower margin requirement.

    The leverage of this trade is called Authentic Leverage and is found by dividing the standing size of this trade, $25,000 in this scenario, by your account size of $5000. So $25000/$5000 = Authentic Leverage = 5:1

    5:1 leverage is fine in case you've got a lot of expertise. It isn't okay for a beginner. A beginner with little to no expertise will wipe out their account using 5:1.

    A beginner should use 1:1 leverage or less until they have learned how to trade using consistent profits with time.

    A beginner should also exchange a micro account with $1000 lots. Period. End of discussion.

    A novices objective is not earning money.

    A novices objective is to learn how to exchange with consistent profitability over time. If you can't make money trading just one micro lot, then adding more lots is only likely to deplete your account quicker.

    Read the Total Money Management thread slowly and carefully. If you still don't get it, then read it again and again until you do. Ask questions as they arise during your reading.

    Trading is easy once learned, but learning to exchange is quite difficult. It is going to take some time, a lot of effort, and lots and lots of reading reading reading.

    Here really is the best forum on the web for learning how to trade forex, but a person has to employ themselves and employ effort.

    Dial

  3. #3
    How to applay 200:1 leverage to this calculation?
    Leverage does not really apply here. It doesn't matter if you're trading with 50:1 or 400:1 leverage, the price per pip will be the same.

  4. #4
    Junior Member Medusas's Avatar
    25
    Thank you for answers.
    However, what edge leverage provides (or takes away)?

  5. #5
    The easy response is leverage permits you to carry more open transactions. A greater leverage will provide you the advantage of trading more lots. In your scenario of 2% per transaction, this truly doesn't apply. If, however, you're opening many positions, with each representing 2%, a greater leverage will permit you to shoot higher losses in such positions before a margin call is initiated. I would not worry about it if you're only keeping one transaction at a time open, every one of which is less than 2% risk.

    If you want more information about leverage, you will find additional threads from the forum. Perhaps Eastmaels can chime in with some hyperlinks as usual.

  6. #6
    Junior Member Medusas's Avatar
    25
    Thank you very much, Twinchell. It really helped me to clean up a mess in my head (at least a little).

  7. #7
    Dial pretty much hit the nail on the proverbial head, but I would just add that you should attempt to not be worried so much about leverage at this time, and just concentrate on opening as few places as possible at 1-2%. Whenever you have a system that's been tailored for you, by you, and can be successful and profitable, then you can up the risk should you desire. However, as Dial has said, if you can't get your head together with 1 percent risk, then you are just going to deplete your account quicker with a greater risk acceptance.

    Your primary goal is to survive. If, after one year, you have $10 in your account, you can consider yourself winning. In the event you break even, consider yourself really profitable. If you actually make money your first year, get ready to quit your day job in a few years because you are probably already at the Pro level mentally.

  8. #8
    Junior Member Medusas's Avatar
    25
    Great advise. Definitely I will follow the 1-2% and low authentic leverade rules.
    To put my thoughts in a proper way and to understand is exactly what I'm going to do. That is the reason why I have demo account. I place it for 5000 to pretend that it's real cash because it's how much I would begin with on actual account.
    So, I'll do my best to keep MY MONEY IN MY POCKET and allow it to grow.

    Thank you again!

  9. #9
    I have also had some questions concerning money management in a forex accout versus a regular equity trading account. I discovered this guide to be helpful in explaining how to figure leverage. Hope a few of you find it useful...http://www.tradingfives.com/blog/?p=116

  10. #10
    It depends on the currency pair you're trading. For GBP/USD and EUR/USD yes, you can trade 50,000 because for all these pairs 1 lot = $10 per pip. Any pair that's XXX/USD will be 10 a pip a lot.

    Other pairs vary. Basically, you would like to trade $5 a pip. If you're trading USD/JPY, its $8.60 a pip for 1 lot, so you wish to trade around 58,000 for $5 per pip.

    FXSol has a great pip calculator in their platform. Hope this helps.

  •