A question for those in the know.

[parkofgrey]

Okay so my experience with trading of any kind on any market basically boils down to reading a single book. I literally only learned about the way you can leverage in forex markets but a few days ago, and I am losing sleep because of how excited I am over what I believe to be a tremendous opportunity to make money. That being said, I think I should first get my facts straight because at this point I’ve only traded on a demo account with a fake $5000 manually on meta trader 5. I’m actually up $960 dollars too, though I know I just got lucky. I guess I should also explain that I’m 24 and have worked as a programmer for the past six years. Also I plan on coding an automated trading system using mq5, and following a very specific strategy after conducting a monstrous amount of research. I’m not arrogant enough to believe that the scenario I’m talking about below (netting 6% growth in a year over the spread) is as simple as I’m making it sound. Anyway, now that we’ve got that out of the way, let me get to my question.


Say I have $5000 dollars in my brokerage account, and I’m leveraged 200:1. If I go all in on a currency, I’ll have a margin of 50 pips before my brokerage account hits 0 and I lose everything. That would suck, and obviously I don’t want that. However, I’ve seen most online brokerages say you can never lose more then what’s in your account, which makes me assume they auto sell once you exhaust the margin. On the other hand let’s say with a spread of 1.8 pips, my currency goes up 5 pips, netting me 3.2. In this instance I would have made a profit of ((200*5000) *.00032) or $320 dollars. Here is where I’m baffled. As I understand it, a broker who doesn’t charge commission for trades makes their money by offering you slightly inflated or deflates asking and selling prices, aka the spread. However, if I beat that spread and let’s say I average a 6% return in a year on top of that(subtracting the spread as the cost of trading). Wouldn’t I get 6% of 200X the contents of my brokerage account? I mean that to me is insane. Yea I could easily lose my $5k, but the up side is ridiculous, and I mean who doesn’t play to win? I just feel like there has to be some kind of unknown factor, because if there is not, I will dedicate the next ten years of my life finding a way to make that 6%.

 

[shadowninja]

Slippage will rape you. Adverse news could spike through your stop by 20-30 pips. Of course, there's you that could rape you. You're 5 pips from your stop being hit - you see you're $4500 in loss, you are CONVINCED the market will turn, you add another $5k to the account. Repeat until your wife is strangling you.

 

[parkofgrey]

Dude the wife comment actually had me laughing out loud. See this is why I want to use an automated system. No emotion, only after the fact analysis of why something succeeded or failed. I think I would end up bobbing back and forth in a box on the streets if I let myself get emotionally involved as these positions were happening. That being said, part of my strategy is to stay out of the market, and only engage on what I find to be indicators with the highest success rate. I don't want to hit home runs, nor do I expect to win every time. I only hope that the average over a given amount of time is positive, and then if it is only 3% over a year, the return on what was really only a 5000 dollar investment is staggering. That is if I understand everything correctly.

 

[shadowninja]

I know someone who did similar because they were convinced they were right. Ended up turning a low amount of money into owing IG Index £100k and having to sell the family home. The wife and kids were not happy.

Test your idea out for a year with $100. See what happens.

 

[parkofgrey]

Dude I totally agree. Like I said, even if it takes me ten years. I will not involve myself emotionally in the trading or the learning processes. I'll invest $500, see what happens, if it fails look at why and how the market evolved away from what I detected as being indicators of volatility in a specific direction. I will spend at least two months researching, pulling data and attempting various methods of extracting indicators before I even launch something on a demo account. I'm the student, not the teacher, and I totally expect to get my ass kicked by the market in the beginning. However, if I can improve to that point where I will make 6% a year, then on a $40k investment leveraged at 200:1, I'd make close to 500k a year pretax. That is if this system is as I detailed above is correct, and I don't see you taking issue with that, so I assume it is.

 

[Shakone]

It doesn't sound like a good plan in my opinion, when you consider the amount of successful trades you're looking for, and the fact that you're saying one bad trade (perhaps on ly 50 pips against you) will wipe you out. I think you'll be wiped out.

 

[wackypete2]

It doesn't sound like a good plan in my opinion, when you consider the amount of successful trades you're looking for, and the fact that you're saying one bad trade (perhaps on ly 50 pips against you) will wipe you out. I think you'll be wiped out.

...like a surfer making a poor run it'll look ugly.

Peter

 

[shadowninja]

As mentioned, the issue is that one day you will take a loss. If you are risking 100%, even if you don't suffer slippage, you will take that loss. Nobody can trade with 100% accuracy.

 

[Shakone]

I don't know if any of this is helpful but...if you want to make money from your capital, you need to obviously have some capital. If you have a random outcome and risk 100%, you won't have capital for long. If you're aiming for 3 pips daily with a stop of 50 that wipes you out, I'll be impressed if you can last a month.

 

[parkofgrey]

Well for some reason I can't seem to edit my first post, so I'll reply to my own thread. When I said "If I go all in on a currency, I’ll have a margin of 50 pips before my brokerage account hits 0 and I lose everything." I was trying to outline my perception of how the system worked, and that comment had to do with the idea that I can't lose more than whats in the account itself, even though I'm technically betting 200x or whatever that amount via leverage. I would never have a stop gap that was equal to the margin. When I said all in, I meant taking a single position with all my capital, not having a stop gap that equals the entire margin. That is totally insane.

 

[brewski1984]

From my understanding of this, which is probably totally wrong, it sounds as if you're thinking you can eventually deposit 40k in an account and never be able to lose more than that yet by using insane leverage be able to make 500k profit? If a 6% movement in your favour makes you nearly 500k, how small a movement against you will it take to wipe you out?

 

[BeginnerJoe]

The difference between a demo account and a real account is that in a real account, people in the market can see your money on the table. They will club you senseless and grab the money from you. This is often done by busting your stop within a second of your placing a trade.

It's sensible of you to only aim for a 6% profit on your money. But I would consider you to be extremely fortunate if you only lose 6%. You'd still be pretty lucky to lose only 60%.

Here's an instructional video for you, or anyone else who hasn't realized the market is rewarded every time it takes money from you. The market is extremely motivated to do so, and does it unceremoniously.

http://www.break.com/usercontent/2008/1/Stock-Futures-Trader-losses-it-all-and-flips-out-438981

 

[StupidCow]

Yea I could easily lose my $5k, but the up side is ridiculous, and I mean who doesn’t play to win? I just feel like there has to be some kind of unknown factor, because if there is not, I will dedicate the next ten years of my life finding a way to make that 6%.

All you have to do is go look at thousands of charts. Just sit there and gaze at them until you can see the higher highs and the lower lows flowing like rivers of water. All you need is some good Support & Resistance lines coupled with some good pivot points. That's all it takes. You don't need to study the market's data and you certainly don't need to conduct any analysis of that data to formulate an indicators. And, by all means, don't waste your time thinking that you can discover something new about this business.

Everything that has already been learned about markets is already known. There are no Holy Grail approaches and nobody on earth can trade at super high levels of consistent accuracy - besides, who needs accuracy anyway when you can Martingale your way to success, by adding more of your equity to losing positions, because you know without a shadow of a doubt that as long as you picked the right Support or Resistance line, the market will eventually come back to your entry point and make you whole again. So, go out there an really learn how to Martingale! You really don't need anything else. If the market starts going against you, just add a little bit more capital to your losing position. If the market starts sliding against you some more, add a little bit more to the losing position. If the market then rips against you really hard, then rip back by adding even more to your losing position.

By the time the market is done ripping on your losing positions, you will have accumulated a massive amount of capital just waiting to rip back when the market returns to your Pivot point level. And, remember, always do this with the trend. Never listen to anyone tell you that the trend is not real, just a figment of your hyper-active imagination, or a psychological crutch used to project your desires of directional stability onto the market. No, no, no. Shake those fools off and don't allow their stoic voices into your head. Absolute, not. Just say no to those voices and stick to your guns. Just because the market ripped off of your trend line plot, does not mean that it won't come back.

Remember, the trend is your true friend.

Oh, I almost forgot. Don't forget that price action is no distant cousin either. Treat both the trend and price action with a tremendous amount of respect, because they are never wrong. In fact, worship the trend and pay homage to price action, or they will both clean your clock for you without hesitation.

If there is anything else I can help you with my friend, please see me inside my trade journal called: Mad Cow Trade Journal: EURUSD.


-----------------
A Truly,
Stupid Cow

 

[Shakone]

Well for some reason I can't seem to edit my first post, so I'll reply to my own thread. When I said "If I go all in on a currency, I’ll have a margin of 50 pips before my brokerage account hits 0 and I lose everything." I was trying to outline my perception of how the system worked, and that comment had to do with the idea that I can't lose more than whats in the account itself, even though I'm technically betting 200x or whatever that amount via leverage. I would never have a stop gap that was equal to the margin. When I said all in, I meant taking a single position with all my capital, not having a stop gap that equals the entire margin. That is totally insane.

It's not clear.

You have 5k, and leverage of 200:1. That means you can have a maximum position of $1million, equuivalent to $100 a pip. To make $60k, you need 600 pips gain before you have drawdown of 50 pips (which would cost you your 5k).

How large a position are you planning to take?