Getting a Life ... Position Trading the higher Time Frame

Originally posted in Traderpedia: http://www.trade2win.com/boards/traderpedia/54928-position-trading.html

After searching for "Position Trading" I came across the post by thetopbloke, and didn't realise I was in the incorrect section to be posting a method of trading.

However ...

This is one of my fav subjects ... position trading. In fact I am completely baffled as to why traders spend so much time trying to make money scalping.

But that's understandable - I suck at scalping!

On the other hand, it could be because of my belief that no trader should attempt to trade FX unless they have managed to master at least 4H charts. I would recommend Daily charts for beginners - but that's me. Obviously people are doing very well through scalping techniques, going by the proliferation of threads covering that method of trading.

I hope one day to graduate to scalping, but it is a deadly environment for slow-wits like me.

Meanwhile - position trading!

I have a method I like to use that involves lagging indicators, though why we have to call them "lagging indicators" is beyond me - they ALL lag!

Set up MT4 chart as follows:

1) Price bars preferred to candles - own choice
2) 4-Period EMA
3) 10-Period SMA
4) RSI 14-Period
5) Stochastic 14,3,3
6) 2-line MACD (with or without histogram) 8,12,9

That is the basic template. I prefer no histogram on MACD as I am simply looking for the lines to cross. Remember too that MACD and Stochastic show different things, and for position traders these are helpful to our decision making.

a) MACD warns us that a trend is beginning to gain momentum, or slowing.
b) Stochastic warns us that a trend is beginning or ending.

The other thing I use Stochastic for, is to tell me the STRENGTH of a trend. You may not agree with me, but for as long as the Stochastic remains above 80 in the "over-bought" zone, the rally will continue hard, and vice versa for under 20 in "over-sold zone." It's just one of the indicators that allows me at a glance to tell if my trade needs maintenance or not.

If Stochastic is above 80, and I am "long" then I don't need to be concerned for the health of my trade.

RSI is an "optional extra" - it's a personal choice, and to be candid, I rarely consciously use it. It can be used to generate confidence depending on whether RSI is already above its 50 line, or turning up from underneath its 50 line. Both of those conditions will mean different things to different traders. Some will wait until RSI DOES cross its 50 line before going "long." I don't - if it is turning up, and agrees with Stochastic, then I become seriously interested in a trade.

The attached chart is the current action in the NZDUSD.

This is a take-your-time trade - no rush, no errors.

But to trade this way you are far better to use LOWER leverage - less than 50:1 and to use stops based on 1.5 x ATR.

Have a play with the concept - I love it.

Other options are to have an additional 2 templates set up identically except for the MA's.

1) 2-Period EMA with 5-Period SMA
2) 6-Period EMA with 15-Period SMA

The fine tuning advantage these additional templates give, is a faster and slower cross respectively of the MA's, or a view of the relative positions of the two MA's. This is the same as looking at different time frames when trading with other styles.

Last comments:

Yes - the relationships hold true for other TF - eg 4Hour and 1Hour.
And no - I don't have the perfect exit for you. These are discretionary according to risk profile. If you are cautionary, you will exit on loss of momentum as shown by MACD, or on potential reversal as shown by Stochastic. My personal choice is to exit when the two MA's cross again, but not always ... sorry I couldn't be clearer about exit.

As I mentioned - I suck at scalping, so can not confirm their usefulness in that genre.

Good luck with it - shouldn't be need for too much comment, unless you wish to post your own nice trades.

Kind Regards

Ingot

USDCAD Daily Chart

Just a quick post to show you another I found after posting the NZDUSD above.

This USDCAD trade could have been entered at 1.2390 had I seen it. I wasn't looking really. At time of writing (after I made the chart) the profit is 282 pips. My personal profit from the actual entry is around 100 pips Demo a/c.

btw - I entered a short position on the NZSUSD after their closing cross, and that trade is up 56 pips already.

Now don't get me wrong - it is easy to always highlight the winners - it is only natural that I do that - we like to demonstrate what our methods are capable of. But the method does give the occasional whiplash signal, and losses happen.

I am just like many others - I am not rich through my trading, but I do think this method is a good one, and takes the stress out of sitting on the "stop" button.

I haven't gone into pyramiding into some of these nice long trends once they get momentum - but that is the beauty of Position Trading - you have the time to exercise judgement, and take advantage of a decent scaling-in approach to load up on clear winning situations.

It is very hard to do that with scalping, though not impossible to be sure.

IMPORTANT POINT: When taking these kinds of trades, you absolutely MUST be patient and ensure that ALL CRITERIA have been met first. This includes WAITING for the candle to completely close. If there is STILL some doubt about the trade, your choice is clear:

1) Wait until one more candle completes to CONFIRM the setup
2) Move on. There are 1 dozen good pairs to trade - why settle for something risky that will only destroy your edge?

Hi Ivan,

When trading this style, how long do you normally keep a trade open?

Cheers,

montmorencyt2w said:

When trading this style, how long do you normally keep a trade open?

Click to expand...

That is a very good question, M. and highlights a perennial dilemma faced by most traders. I say "most traders" because despite the rhetoric we see and read on the pages of T2W and other forums, many of us - myself included - simply trot out our Demo accounts showing the "results" of the method.

I have attached a screen shot of my last 10 trades (yes, on Demo) opened using this method exclusively, since 02/04/2009. I opened 10 contracts on the 9 pairs shown, in the direction shown, and one x 10 contract SHORT of Gold.

If you have been able to work out what is was going on about above, there are a couple of ways to operate this method.

1) Even though I am operating on the DAILY chart, it is possible to drop down to the 4H and even the 1H TF to "fine tune" the entry and the exits. I have no hard and fast rule - I think whatever any trader wishes to do is legitimate when trying to make money. So I would not feel violated if a PSAR, or trailing ATR etc were to be uses, or a simple arbitrary 100-pip, or 60-pip trailing Stop. To be open with you - I simply don't have an exit strategy locked into this.

2) I have created 4 templates - all for use with the DAILY charts (these also operate as above, on other TF as well).

The main one I use to screen the trades initially, is the 6 EMA (faster, BLUE line) with the 15 SMA (slower BLACK line). This gives me the LONG TERM TREND

Once I find a candidate to trade, I change templates - same Daily chart , but I use a 4 EMA (faster Blue line) with a 10 SMA (slower Black line).

This is usually enough to tell me how early in the trade it is, and whether I can jump in, or if I should wait until a pullback is complete.

Finally, in order to be certain, I use the third template - again the same DAILY chart, but with a 2 EMA (faster Blue loine) and a 5 SMA (slower Black line).

I do combine both views (ie 1 and 2 above) but I prefer the second method.

I also use the 14 period RSI and the 14 period Stochastic, as well as the MACD 8-12-9 without histogram, as I explained earlier.

I will post 4 charts plus the screen shot of my demo account. I hope no one gets petty about the fact that this is not real money yada yada. We already know that - I have said so. But the object of this exercise is to SHOW that trading from DAILY charts has far more merit than screen gazing for scalps - but that is how trading is suited to me - I do not presume to be so self-righteous that I should be telling others how they should play the markets.

The Grey background charts are the THREE different MA's on the SAME Daily chart.

The other chart will look a bit cluttered, and rather odd. That is because I have placed ALL THREE SETS of MA's on the one chart. To the untrained, it will look confusing. But let me explain what you are looking at:

The BLACK lines are the Short Term or 2EMA x 5 SMA - a faster set of MA's to view short term action.
The BLUE lines are the Medium or 4 EMA x 10 SMA - a slower set of MA's
The RED lines are the Long Term or 6 EMA x 15 SMA - a very slow set of MA's
Once you know what you are looking at it is possible to see the three trends on the same chart.

This is very helpful if scalping on lower TF, where you can remove a set you find no use for). But I find it very good for the Daily charts for entry timing. The ST can show you when a trade is settingnup, and when the Medium term lines cross, you know you have a signal. The final trigger comes when there is not only a clear cross of the two MA's, but THAT candle has completed.

You are then free to enter at the open of the new candle, provided you still feel hapy with the trade.

That's a lot to take in I know, so if after you study it a bit, you still have questions, I would be pleased to work with you to clarify it a bit.

I love these LT trades - trouble is that since this rubbish in the USA with the financial markets becoming so volatile, the nice long trends have gone, and we have to contend with volatility never seen before in retail forex.

Doesn't matter - in the event one or two of our trades do run to a few weeks, we will have many thousands of pips flowing into our account like a river!

Now that's got to be good!

Hopefully you can see what I am getting at. I may not have been too clear - but that's ok - we have time to sort it.

Off to sleep after the third of 3 x 10hr night shifts. It is because of my shift work and my age that I am wanting to develop this method , and I think I am getting close.

I am offering it freely - warts and all.
Hope someone can see the immense value in this.

If not - that's all good too - we are all different.

Kind Regards

Ivan

Thanks Ivan.

A very full and detailed reply!

I think there is much of value in here (but I speak only as a relative trading newbie, to be honest). For some time I've been studying Trader_Dante's method (see "Making Money Trading" and also "Potential Setups", and am trying to give that my best shot at the moment; quite a lot of investment in time and effort (not to be compared to TD's efforts though). Actually your approach and his have certain things in common.

For anyone who doesn't have time to work through TD's long thread, and is looking for a relatively simple, reasonably low-stress approach, yours certainly looks worth looking at.
There's more than one way to skin a cat.

Agree with you about scalping and short time-frames. It's a young man's game, and would make me old (i.e. even older than I am) very quickly. Even trading daily and weekly can be stressful enough.

Best wishes,

Great posting Ivan !!

I don't like trading systems that are based on indicators. The CHART is what you should be looking at.
Indicators are lagging. Seriously lagging. Your system will do well on trending periods, but at ranging periods (which occur most of the time) you will stink.

For how long did you test your system? On what pairs?

Knock!! Knock!!

Miki256

Your very first post on this forum:http://www.trade2win.com/boards/forex-strategies-systems/57428-forex-megadroid-6.html#post717166

And now this one ... your second post on T2W!!

Please promote your Blog business elsewhere. This is a POSITION TRADING METHOD thread.

Ingot54 said:

Miki256

Your very first post on this forum:http://www.trade2win.com/boards/forex-strategies-systems/57428-forex-megadroid-6.html#post717166

And now this one ... your second post on T2W!!

Please promote your Blog business elsewhere. This is a POSITION TRADING METHOD thread.

Click to expand...

This is my opinion and it has nothing to do with me promoting my blog.
You can POSITION TRADE but from my experience almost all systems using indicators are lagging and will just stop working sometime in the future.

And yes, I promote my blog. I write good articles and I think they can help many traders. This is a trading forum, isn't it?

I am deeply sorry if I offended you in any way. I didn't mean to, and if it seems like I was spamming it is clearly not it.

Miki256 said:

This is my opinion and it has nothing to do with me promoting my blog.
You can POSITION TRADE but from my experience almost all systems using indicators are lagging and will just stop working sometime in the future.

And yes, I promote my blog. I write good articles and I think they can help many traders. This is a trading forum, isn't it?

I am deeply sorry if I offended you in any way. I didn't mean to, and if it seems like I was spamming it is clearly not it.

Click to expand...

Miki256 - please READ MY FIRST POST: I mentioned that I use "Lagging Indicators" there.

You are welcome to ask questions.
You are entitled to a point of view.

But you have not understood, nor appreciated the experience and work that has gone into the posts on this thread, not to mention the time put into getting the charts "just right" so as to more clearly explain what and why something is occurring, and how it works.

The thread hasn't even commenced properly yet, and I am certain there are people out there who are fed up with screen watching and scalping, and making no money for their time, who find an approach involving DAILY and WEEKLY charts refreshing, if not only quaint!.

Many traders are becoming physically unfit, and are losing their relationships with loved ones, like I was, simply because they are trying too hard to make trading work for themselves and their families. Clearly what many traders are struggling with, is not working, but they don't know what else to do. They don't have a way out of the daily struggle to find that key that will open the door to trading success.

What has been created here, in order to explain the benefits of trading LONGER term as opposed to SCALPING, has been rebuffed and swept away by your 7 or 8 brief negative statements:

"I don't like trading systems that are based on indicators.
The CHART is what you should be looking at.
Indicators are lagging.
Seriously lagging.
Your system will do well on trending periods, but at ranging periods (which occur most of the time) you will stink.
For how long did you test your system?
On what pairs?"

Your attitude is that of an olde worlde school marme - smack! smack! smack! You dismiss out of hand, any experience I might have, or that I am attempting to bring to this forum.

Not a single positive word, not an ounce of encouragement - yet you purport to be some sort of guru who is going to lead the world to financial independence through your blog.

You are certainly "hung-up" about what you so authoritatively call: "Lagging Indicators" as if lagging indicators are something to be avoided at all costs if you are to become successful at trading these instruments. I suspect the new thing sweeping the education links called "Price Action" is something you embrace?

I don't really care - but "Price Action" is simply the application of Reversal Bars and Candles, the same as they have been since Steve Nison published his book in the early 1990's - just after you were born. In fact Nison has been doing this stuff for over 25 years now - well BEFORE you were born, and I actually love price action myself, but do not use it exclusively.

Miki256 - if you had any systems or methods, they would be up and posted, along with "pairs and tests" both on your blog, and to give yourself credibility on your few ventures onto this forum (and others I suspect) you would have your own thread open for public scrutiny here.

What your statement says, on your blog, is that you are going to give these struggling traders the keys to the executive washroom through your tested systems, psychology and whatever - just the usual stuff that 100,000 trading sites the world over are pushing - all with the same, miserable and dismal effect - zilch!

Miki - if you are patient and willing to learn, you will begin to understand more. I hazzard a guess that you are early twenties, failed trader, frustrated with your day job and have made the decision to use a blog to get to easy street. Typical Generation Y - had everything as a child - spoiled rotten, no manners, no gratitude, no respect, no grace or goodwill, and certainly no effort put in towards a half-decent education.

I hope this does not apply to you - but sure sounds familiar!

Miki - the world will NOT beat a path to YOUR door.

I invite you to stay on this thread, and to ask questions as a means of challenging me to provide reasons for why I am trading this way.

If you wish to begin a thread of your own, I would be willing to contribute in a positive and constructive way to yours too - forums are for opinions and learning.

But please - take your shoes off at the door before you stomp all over someone's construction. You will be better received and will annoy no one.

Here is this morning's statement of my "Lagging Indicators" method for your comment.
Can a scalping method match this?

Doubtful you could manage 10 open positions simultaneously to produce 2000 pips in 3 trading days!!

Getting a Life

The thread hasn't even commenced properly yet, and I am certain there are people out there who are fed up with screen watching and scalping, and making no money for their time, who find an approach involving DAILY and WEEKLY charts refreshing, if not only quaint!.

Many traders are becoming physically unfit, and are losing their relationships with loved ones, like I was, simply because they are trying too hard to make trading work for themselves and their families. Clearly what many traders are struggling with, is not working, but they don't know what else to do. They don't have a way out of the daily struggle to find that key that will open the door to trading success.!

Click to expand...

In my irate response to Miki256 I made the above statement.

Many methods promise a strategy that will give you "Financial Freedom and Independence" but I am here to tell you that Financial Freedom is still some years away for beginners. In fact I would go so far as to say that any trader using a broker to place their trades, who offers 100:1 leverage and higher, is still MORE than "some years away" from success.

Until traders realise that using more than 50:1 leverage is financial suicide, then it will continue to be difficult for them to make money in Retail Forex Trading. The problem is that many traders are undercapitalised for trading in these markets.

So to make it easy for them, brokers have invented "up to 500:1 leverage" and promoted this as if it is something to be desired. It is NOT.

It is hard enough to win using 10:1 leverage.

Sure there are some "doing ok" and I am fully expecting a few indignant replies from some who have a blog, a signal service, a "system for sale for only $97" or a "trading room with access for only $149/month" where you can "learn to trade like the Pro's".

Let me be quite candid: I do not know of any "Pro's" - but that does not mean they are not trading profitably out there. Fact is, if they are profitable and doing ok, why the heck would they offer some altruistic reason for "sharing their whiz-bang trading method" for free on a public forum? I think you will find that the "Pro's" are a long way away from any Internet Forum with few exceptions.

I can tell you, if I was making money with my method, I would indeed be doing something differently from what I am at this instant. I certainly would not be trying to explain my Position Trading method to anonymous members of a forum.

So why am I doing this?

1) I am a failed trader in the lower Time Frames.
2) I have lost my confidence and can not bring myself to trade live any more.
3) I have found through reading some eBooks or other that ST trading is dangerous and difficult.
4) After attempting to trade LT I did indeed find that the slower development of Position Trading using Daily charts, suits my personality and risk profile.
5) Posting my demo trades and charts, as well as reasons, enforces a discipline that is missing in live trading for me.
6) Running my trades and charts past other experienced traders may give me further insights, and indeed the courage to actually attempt live trading once again.
7) I am certain that life has more for me and others, than sitting at a desk, getting fat and unfit, and wracking my brains for the best way to handle the Retail Forex market.
8) My own family have seen little of me over the past 5 years, and I have to either get this engine cranked up and running, or opt out for good.
9) Yes - I do have an altruistic motive to help others, but my own interests lie somewhere in between, and if it comes down to it, I am really selfish about wanting success.
10) EGO - I like to see the results of my work in print, and to get positive feedback.
11) I have discovered the dangers of trading using leverage of higher than 50:1 (and as stated above, more than 10:1 is very difficult to manoeuvre successfully) and wish to discuss leverage with others who use 10:1 or 20:1 successfully.

There are probably other reasons - but no, I do not wish to sell anything - it will all be placed here in full view. Why sell something that will be copied and emailed to every Tom Dick and Harry around the world after the first 10 sales, when I can actually trade the thing myself if it is any good, and make much more money, with none of the angst!

Unless I can be honest about my failings and successes, then what is the good of my time doing this anyway? Only emptiness!

If you have been anything like me, then perhaps Position Trading may have something to offer YOU too.

Please don't come onto the thread expounding the virtues of scalping and/or some other method - please keep the thread pure for the discussion intended. There are hundreds of other threads on the forum for other purposes. That's the reason I was a bit miffed by Miki256's blurt - nothing to offer the thread except a huge knock. I don't think Miki256 even read ONE post.

If you are indeed interested in "Getting a Life" or in getting your life back under control, then please consider whether trading the Daily charts over a week or two, might be able to give you back some precious time.

With best wishes

Ingot

Leverage and its correct use

Ingot54 said:

... any trader using a broker to place their trades, who offers 100:1 leverage and higher, is still MORE than "some years away" from success.

Until traders realise that using more than 50:1 leverage is financial suicide, then it will continue to be difficult for them to make money in Retail Forex Trading. The problem is that many traders are undercapitalised for trading in these markets.

So to make it easy for them, brokers have invented "up to 500:1 leverage" and promoted this as if it is something to be desired. It is NOT.

It is hard enough to win using 10:1 leverage ...

... 11) I have discovered the dangers of trading using leverage of higher than 50:1 (and as stated above, more than 10:1 is very difficult to manoeuvre successfully) and wish to discuss leverage with others who use 10:1 or 20:1 successfully.

Click to expand...

So what is the problem with leverage? Leverage allows you to take on LARGER positions with the same margin, but the distance your Stop Loss can be placed will be shortened with high leverage, or lengthened using lower leverage.

$1000 can control 1,000,000 units with 1000:1 leverage, or $100/pip
$1000 can control 100,000 units with 100: 1 leverage, or $10/pip.
$1000 can only control 10,000 units with 10:1 leverage, or $1/pip.

To understand this issue, it is easier to take a look at the extremes.

Imagine you have 1000:1 leverage, trading FULL contracts, not Mini's.

This means you can control 100,000 units of the base currency of the pair, for only $100.
It also means that if the exchange rate rises by 10 pips, and you are "long", then you will be credited with $1000.

Similarly you will be debited $100 for every one-pip move against you, or you will lose $1000 for a detrimental 10-pip move. heady stuff indeed.

Clearly you can now see that an account of $10,000 could only sustain a 100-pip loss before wiping out, at 1000:1 leverage.

But this is not the only problem: If you want to trade using a stop, you will have to submit a margin to fund your position - that is mandatory. A 10-pip stop-loss order will require $1000 margin, and a 50-pip SL will require $5000. That leaves NO ROOM for money management whatsoever - where is your "2% of account per trade" now?

You can not do it using such leverage, and the brokers who offer high leverage know this. Traders use it because it is offered, not in any way understanding the implications of the leverage they are using.

In my view, this is criminal, but traders need to take responsibility for their own accounts, and do the hard work - the head work - necessary to fully understand leverage.

It is my view, that not one in 20 traders understand this anomaly - probably far fewer.

Currencies move 10-pips before yawning! Unless you are lucky enough to get an initial move in your favour, you are gone. Most 5 minute charts show "noise" of 10 pips in a 15-minute period - in either direction. To confirm what I am saying, have a look at the ATR of a 5 minute chart, or a 15 minute chart! Scary indeed, unless it is going over your head.

The 14-period ATR of the 5-minute chart of EURUSD is currently 7 pips, and the 15 min ATR is 12 pips!! Currently volatility is low. It can get to 60 pips eaily - (see 5 and 15 min chart of EURUSD on 18th march 2009)

You would need to be exceptionally fast, alert, and have a good Internet connection/software etc to even begin to have a chance to close out a position as it moves into profit or indeed, loss.

I don't know anyone who could do that.

Now - let's look at another extreme - leverage of 10:1 at the other end of the scale. In fact - I think you would find it very difficult to find a broker who would offer you 10:1 in Retail Forex. I don't know of any. It is NOT in THEIR best interests to keep your account in YOUR hands ... and growing.

Using the same scenario as above, with 10:1 leverage controlling 100,000 units of the base currency of the pair, you will need to submit $10,000 margin deposit. The big difference - and it is really huge - is that your pip value is only $1.

Now before you think: "Oh, I'll never make any money at $1/pip" you could well be right ... partly. But considering what your record is now, the news can only get better.

Here's why:

Currency trading is a big boy's game - but since the regulations have opened it up to Retail Trading (or Off-Exchange Trading) it has been a licence to print money for any broker fortunate enough to have gotten established in those days (1996).

Brokers already knew that if they allowed traders the use of high leverage facilities, they would sweep clean any and all accounts, bar the savvy few who refused to indulge in this foolishness.

So why does the use of low leverage offer ANY advantage at all, given that traders can not make as much money as they could using the higher leverage freely offered?

As mentioned, FX trading is a game for big players with deep pockets. Foolishly, Joe Schmoe thinks he can match these bigger players, by artificially boosting his control of a contract, through use of leverage. Trading firms love to promote trading competitions, where their winners have managed to "turn $10,000 into $362,873.55 in only 90 days!".

What they do not tell you is that the winners went for an all-or-nothing gamble, and it happened to pay off. They will NOT publish all results and ALL trades for the same reasons - it exposes the lies and untruths associated with the promotion of their "system".

So, unfortunately, if you have been losing using 100:1 margin, going to 200:1 or 400:1 will only make things worse.

While 10:1 or 20:1 or 50:1 leverage may be slower, it is also streets ahead in safety. And the reason is this: You can place a 200-pip stop-loss order for $200 using 10:1 leverage! But if you are using a 100:1 leveraged account, the same 200-pip SL would cost you $2000. Not many people could afford that - especially if trying to operate on 2% risk of capital per trade.

So many switch to Mini accounts, or opt to put up with the dangers of higher leverage.

There is no quick way to riches in Retail Forex - no matter WHAT the advertisement says. In order to make money in this, you have to have money to begin with. However, the method I am showing readers, is a way out of the dilemma.

I am very sure of it.

The reason is this: If you look at the Account statement from this morning's post above, you will see that on a demo account, I have been able to make over 2176 pips in only 3 trading days. basically I have just let the trades run - wide SL and no Take Profit orders (yet).

Now at any time these trades could go against me, and wipe out much of the gains - in fact during the composition of this post, the portfolio has fluctuated a lot for the 9 pairs plus Gold. The purpose of my posting is NOT to show you how good a trader I am - I actually suck big time as a trader - but to show anyone who has ears to hear and eyes to see that indeed money CAN be made with limited capital.

But NOT through scalping - (you might - but you will get burnt at some time ... or burn out!)

Looking at my demo account account, those 2080 pips in 3 trading days, using 10:1 leverage, represent $2000 profit. In the attached screen shot, I am using 10 contracts, so the dollar amount is looking more impressive than it is in reality.

I submit a current screen shot, using pips instead of dollars, but keep in mind that the account is set up for minis, and is showing mini-pips, not full contract pips, so it appears 10 times larger there too.

I currently have ONE losing trade out of the 11 opened - the USDCAD. It is in the early stages of drawdown, but I am confident the 40-pips loss right now will reverse overnight. I have not entered a SL for that pair just yet.

With best wishes

Ingot

It CAN be done using Daily Charts.

Hi Ingy....

You put forward a very convincing argument.... one that should not be dismissed lightly.

Further.... your explaination of leverage trading is a big wakeup call to novice traders that will be venturing out into the big bad world of biased trading.

The vultures are circling as newbies throw themselves at them.

Newbies believe that they can beat seasioned traders in a game that is heavily biased towards the brokers(traders).

A very good post mate....one of your best.

cheers
DC

Hi Happydays2

Thank you for your observations.

The correct use of leverage deserves a thread of its own. I did a search of the forum yesterday but couldn't find anything on T2W.

How wrong I was!

If you have a look at this link: http://www.trade2win.com/boards/search.php?searchid=3622634

it is a virtual Index of previous work on the subject of Leverage.

Just goes to show that if you understand how to use the search function on this forum, there is a lot of shared knowledge from knowledgeable people stored here.

Leverage can work in the trader's favour of course, as well as against him - but the fact that brokers are happy to offer 100:1 and higher should set off the alarm bells. Brokers are there to take the trader's money - I don't hear any of them disputing that - but they disguise their modus operandum in ways that give it the appearance of respect and legitimacy.

Have a look at this link: http://www.100forexbrokers.com/high-leverage-brokers

Note that IG markets are offering 700:1 through their "Pure Deal" Platform. That is not only insane - it is criminal, because less than 1-in-20 traders even understand the implications of using high leverage. This is a sales gimmick to attract undercapitalised traders - another issue entirely, and another one that works against the success of a trader.

You can control leverage to a degree, by the use of Position-Sizing, and Stop-Loss placement. Both of these will be a function of how much of your capital you wish to tie up in margin.

I would imagine that less than 1-in-50 traders are using the 2% rule faithfully. I know this is right without even asking the question, because of the proliferation of mini, micro and nano accounts offered by brokers. In short, traders are betting pretty much all they have, otherwise they wouldn't even bother to trade.

Imagine you have an account of $10k. If you are using the 2% rule, your risk per trade is calculated at $200. At 100:1 leverage, you can allow for just 20 pips Stop-Loss, and in most cases the spread eats into this as well.

With $10,000 account, a 20 pip loss would cost:

@ 100:1 you control 2 full lots (contracts) and lose $2,000 = margin required for the position.
@ 10:1 you control 2 Mini Lots and lose $200 = margin required. or another way:
@ 10:1 you control 20 Mini Lots (=2 full lots) and lose $2000 = margin lodged as security.

Clearly you would need to increase the amount of margin you are prepared to risk, in order to operate a system where you need a stop-loss greater than 20 pips away, but in order to comply with the 2% rule, you would then need a larger account!

That explains why traders are so eager to snap up the ridiculous offer of 100:1 and up to 700:1 (outrageous) leverage on offer by unscrupulous (that means having no scruples!) dealers. The people who offer such high leverage are bucket-shop operators as a rule. I doubt they would refute that claim - in fact I doubt they would become involved in this discussion at all. The least attention the issue of leverage attracts, the better.

In order to trade the Daily candlestick method I have proposed in this thread, you clearly need to place Stop Loss orders very wide, and even using a mini-lot account, this is stretching the 2% rule too far in an undercapitalised account.

The truth is that margin and leverage are things that you can control. As you use more leverage, your account will become more volatile and the risk of losses increases.

In a later post, I will run through a Position-Sizing and Stop-Setting exercise using both Full Contract and Mini-size trades.

Best Wishes

Ingot

Ivan, to be fair, it's not quite as bad as you suggest, at least with the SB platforms I am familiar with.

E.g. with IG, on a limited-risk account (guaranteed stops), a 100 pip stop at £1/pip will cost you exactly £100. On other other platforms it may be more, but I don't think by a vast amount.

No argument with you about the dangers of undercapitalisation in general though.

Hi Ingot,

I am confused about ur post about leverage.

For a 100:1 leverage, you set aside 1,000 for margin. You do not lose $1,000. It is merely set aside, if ur equity falls to this level, eg $10,000 to $1000, a loss of 9,000, you will be still left with your $1,000. Margin is the amount you will be left with in the event of your position going against you and hit the margin level.

So for a 100:1 leverage, if you set a 20 pip lost using a 1 standard lot, your effectively loss is 20pip * $10 per pip = $200. That is the maximum loss. so a risk per trade is 200/10,000 = 2%.

So for a 200:1 leverage, still a 20 pip lost using 1 standard lot, your effective loss is still 20pip, which is $200. Maximum loss remains the same.
Even if your leverage increases, as long you keep ur stoploss in perspective to risk capital per trade, even you using the high leverage, it doesn't matter. I hope I am not typing nonsense here. I may be wrong, please correct me so I can learn from my own mistakes. Am i missing out something??

Shauntan said:

Hi Ingot,


I am confused about ur post about leverage. I can see you are struggling Shauntan, so I'll address your points as we go.

For a 100:1 leverage, you set aside 1,000 for margin. If you use the 2% rule, setting aside $1000 for margin means your original account size is $50,000. Is this correct? If you are not capitalised to the extent of $50,000, then you are effectively risking MORE than 2%. If your capital is $10,000, then your margin risked is 10% - way too high. You are allowing yourself 10 trades between success and oblivion. Or else, you are going to be relegated to trading very tiny lots and treading water forever.

You do not lose $1,000. It is merely set aside No - here is where you are moving away from the reality of placing margin as surety for your position. If your margin is $1,000 then this is the amount you are risking. Your remaining capital is relatively safe, unless a thunderbolt event occurs, and the price gaps well past your stop. In that event, you might have to make up any additional loss that occurred before the price rests long enough for your broker to close you out. To avoid this, you could use an account with a Guaranteed Stop Loss Order (GSLO). If you use this facility, then you WILL unconditionally have your stop order filled at the set level. In return for this guarantee, the broker will ask a slightly wider spread, paid at the time of placing the trade.

If ur equity falls to this level, eg $10,000 to $1000, a loss of 9,000, you will be still left with your $1,000. Margin is the amount you will be left with in the event of your position going against you and hit the margin level. No - margin is NOT the amount you will be left with after the trade fails. Margin is the total amount you put up, or lodge with the broker, as a gesture of good faith, to guarantee he will be paid. It tells the broker that this is the maximum you are willing to lose in the event the trade goes against you. In fact, you do NOT have to wait until your margin is depleted. If you are convinced the trade is not working, you can close it immediately - or at any time - and save what is remaiining of your margin deposit.

So for a 100:1 leverage, if you set a 20 pip lost using a 1 standard lot, your effectively loss is 20pip * $10 per pip = $200. That is the maximum loss. So a risk per trade is 200/10,000 = 2%.You have a few things mixed up a bit in there. 100:1 leverage simply refers to the number of units of the BASE CURRENCY that you can purchase using a set amount of Margin. You seem to be keen to use $1,000 margin deposit. At 100:1 leverage, you can control 100,000 units of the base currency. In the case of the USDJPY, you could control $100,000 worth of the JPY, which at the current quote of 100.22 would be 10.022 million YEN. But you should already understand this as second nature if you are trading the Foreign Exhange markets. However, I can see you may need to do some more homework on (at least) this aspect.

Your $1,000 margin would not be at risk if you are using 100:1 leverage in full lots, and the trade goes against you by 20 pips. You are correct in saying that your risk is $200. In fact your trade could go against you by 100 pips before your $1,000 would be gone.

So for a 200:1 leverage, still a 20 pip lost using 1 standard lot, your effective loss is still 20pip, which is $200. Maximum loss remains the same.No - if you are using 200:1 leverage, you can not control 200,000 units of the BASE CURRENCY of the pair. This means you are now trading for $20/pip since your position is TWICE AS LARGE. You may be beginning to see now exactly what higher leverage actually does - it ALLOWS YOU TO CONTROL LARGER POSITION SIZES with the SAME MARGIN put up as surety for the trade. HOWEVER - because you are controlling TWICE as much currency, you can now only put a 10-pip Stop order, before your $200 is used up. Or as I mentioned, your $1,000 can now only cover you for a 50-pip loss. I hope readers are beginning to see now, why it is so dangerous to use high leverage.

EDIT: But I see what you are saying - regardless of leverage, "if trading ONE LOT, 20 pips is still $200." No - at 200:1 each pip is now worth $20. In order for a pip to be worth $10 you would need to trade HALF a contract, or 5 mini contracts - see above.

And this is where traders can succumb to false beliefs, which will cause their downfall. How many readers fully understand what I have said? I admit this is tricky stuff, but brokers KNOW this, and this is the reason they do not ensure you know this stuff before allowing you loose on their trading platforms.

It is criminal and should be stopped, but as long as traders do not understand it, and do not complain to the regulator, it will continue. Not all readers/members will agree on this point - in fact I dare say I would have little to NO support on the issue. But as long as traders do not know they are being rippped, why would they want to change things? After all, if they were told tomorrow that they would have to put up $100 per pip as margin, there would be an even louder outcry from most traders, but cheering from me!

Even if your leverage increases, as long you keep ur stoploss in perspective to risk capital per trade, even you using the high leverage, it doesn't matter.On the contrary, for the reasons just given, I hope you understand now that if you increase your leverage by a factor of 2 (double) you HALVE the number of pips a position can go against you before you lose your margin. Imagine you are using 500:1 leverage. Your position can go against you by 20 pips and your $1,000 will be gone, provided you are trading full lots.

I will explain a way around this below.

I hope I am not typing nonsense here. I may be wrong, please correct me so I can learn from my own mistakes. Am i missing out something??Shauntan - I certainly do NOT think you are typing nonsense. Your questions are those that the majority have been too afraid to ask, for fear of appearing unlearned in trading matters. In fact many of us are still learning this instrument, and I know there are people on this forum who could make me look a bit dumb too if they want to. But we are all working together in this, in good faith, helping each other.

Click to expand...

ONE CONTRACT is the same as ONE LOT, and is 100,000 units of the BASE currency of any pair.

ONE MINI contract is ONE TENTH of one contract, or ONE TENTH of one lot.

Here is where you can still trade well if your account is limited to $10,000, and you still wish to trade higher leverages.

If you trade the mini accounts, then 10 minis is the SAME as ONE contract, or one full lot.

If you want to use 200:1 leverage, and your trading method calls for a 20-pip stop-loss , then simply trade the minis, and take 5 mini lots instead of one full lot (half of ONE lot instead of one full lot).

In this instance, you are HALVING your position size (the amount of base currency you control) but STILL using 200:1 leverage. In this respect, traders with smaller account sizes can STILL trade large amounts, while using HIGHER leverage. But by dropping to minis and controlling half the base currency, you are effectively trading using a virtual $20,000 account.

Now while this sounds good, it is still MORE dangerous than trading 100:1 leverage.

Why?

Because, no matter how small the lots traded, the higher the leverage used, the easier it is for a move against you to clean out your account.

More soon!

Leverage and Lot size

montmorencyt2w said:

Ivan, to be fair, it's not quite as bad as you suggest, at least with the SB platforms I am familiar with.

E.g. with IG, on a limited-risk account (guaranteed stops), a 100 pip stop at £1/pip will cost you exactly £100. On other other platforms it may be more, but I don't think by a vast amount.

No argument with you about the dangers of undercapitalisation in general though.

Click to expand...

Hi Mike - I used a GSLO with IGM and I know what you are saying. But this is very deceptive.

Are you really aware of the leverage IGM are offering you when you trade 100 pips for 100 pounds margin deposit?

My keyboard does not have the "pound sterling" symbol, so I will work in dollars, and convert back at the end of the analagy.

$100,000 (one lot) at $10/pip is the "normal" contract
$20,000 (2 mini lots) at $2/pip is an equivalent ratio.

So ...

At 100:1 this would require $1000 margin deposit for ONE lot
or $200 deposit for 2 mini lots.

So at 100:1 you are probably trading 2 mini lots at a 100-pip GSLO for $200 margin, which as the equivalent of ONE pound per pip, and 100 pounds margin deposit. (Generalised - not exchange-rate adjusted).

Is this correct?

In this instance the leverage is 100:1.

If you wish to trade 200:1 your stop would need to come in to 50 pips for the same margin deposit and same position sze (2 minis), or else you would take only 1 mini lot, and keep your stop at 100 pips.

It all boils down to margin, stop loss order position, and number of lots.

If I knew your actual position size, I could tell you what the actual leverage is that IGM were offering in that trade you mentioned above. We are so used to using this ridiculously high leverage, that we think it is "normal" and do not realise we are being taken to the cleaners.

Think about it.

So you were saying at 200:1, I am trading $20 per pip for 1 standard lot? Am right??

I am using 200:1 leverage account and I trade 1 standard lot, 1 pip is $10. Why is that so instead of $20 per pip?? Please enlighten me.. Im not trying to be funny..

Shauntan said:

So you were saying at 200:1, I am trading $20 per pip for 1 standard lot? Am right??

I am using 200:1 leverage account and I trade 1 standard lot, 1 pip is $10. Why is that so instead of $20 per pip?? Please enlighten me.. Im not trying to be funny..

Click to expand...

I take this seriously Shaun - don't worry - I have actually misled you without meaning to.

Of course you are correct - only the SIZE of a position can affect the value per pip, and the value of the currency pair itself.

I was mixing the fact that many traders actually take advantage of the higher leverage to actually trade larger positions using the same margin deposit. This is a trap.

I have no problems with using larger leverage. It is possible to manage your risk using your stop-loss placement and position size, and that's what is important. However, as I keep harping on about - the temptation is always going to be there to use the leverage to open even larger positions than our rules allow for.

2% does not allow for a very large trade on a $10,000 account. I concede that using leverage can help grow an account with less risk PROVIDED the trader and the method traded, are good.

Those things are certainly not for me to judge.

I enjoyed the discussion Shaun - thank you for the questions - made me dig deep for the answers.

Kind regards

Ivan