Leverage

[marcoose]

OK so I dont fully understand leverage. I get that you trade on margin and that you are essentially placing a bet worthmuch more than your bet per point size. What i don;t understand is that when I tried placing a small spread bet earlier with a stop loss, even though I had funds to cover the potential loss, it wouldnt let me place the bet. It said there weren't enough money in my account to cover the margin requirements.

Please advise!

 

[jd1888]

OK so I dont fully understand leverage. I get that you trade on margin and that you are essentially placing a bet worthmuch more than your bet per point size. What i don;t understand is that when I tried placing a small spread bet earlier with a stop loss, even though I had funds to cover the potential loss, it wouldnt let me place the bet. It said there weren't enough questions on my board to cover the margin requirements.

Please advise!

Where about can you trade using questions?????????????

 

[marcoose]

ha ha! Im editing now!

 

[jd1888]

Who are you trading with?

What was the margin requirements for the instrument you where trading?

What was you account balance at the time?

 

[Scotty2Cues]

OK so I dont fully understand leverage. I get that you trade on margin and that you are essentially placing a bet worthmuch more than your bet per point size. What i don;t understand is that when I tried placing a small spread bet earlier with a stop loss, even though I had funds to cover the potential loss, it wouldnt let me place the bet. It said there weren't enough money in my account to cover the margin requirements.

Please advise!

As I understand it, margin is the amount that is put aside (a good faith deposit) when you open a position. Say you have 1% margin = 100:1 leverage and you want to buy gbp/usd. To buy £100,000 your broker would set aside £1000, if your margin was 2% then £2000 is set aside. My broker would give me a margin call when my equity = margin X position size.

So the 100:1 leverage means you can open a £100000 position with £1000

Babypips.com has a good explanation

 

[marcoose]

Who are you trading with?

What was the margin requirements for the instrument you where trading?

What was you account balance at the time?

I was using spreadex. Not one of the big boys but thought I'd try them out. Can remember how much I had in my account but it wasn't a large bet. Just annoyed me that I couldn't place the bet when I had more than enough in my account to cover the loss if it got to the point where the stop loss kicked in.

 

[jd1888]

I was using spreadex. Not one of the big boys but thought I'd try them out. Can remember how much I had in my account but it wasn't a large bet. Just annoyed me that I couldn't place the bet when I had more than enough in my account to cover the loss if it got to the point where the stop loss kicked in.

It's not just about the stop loss they sometimes want margin + X amount + stop loss.

Like with CMC a while back I made a DAX trade, the NTR margin was 60 (£60 for every £pp you wanted trade) I had £150 in my account and traded it down (losing) to £100 they closed the trade and margin called me even though I still technically had £40 to lose until the £60 margin.

I'm not entirely sure why this is but something to look for/ask before trading with any company.

 

[marcoose]

It's not just about the stop loss they sometimes want margin + X amount + stop loss.

Like with CMC a while back I made a DAX trade, the NTR margin was 60 (£60 for every £pp you wanted trade) I had £150 in my account and traded it down (losing) to £100 they closed the trade and margin called me even though I still technically had £40 to lose until the £60 margin.

I'm not entirely sure why this is but something to look for/ask before trading with any company.

The dealer was trying to explain why it was but I didn't understand. The annoying this is it turned out to be a good bet and would have made a half decent profit.

 

[Ari.Gorian]

marcoose said i am editing..........

 

[Reyjay]

Hi,

I'm not sure if this is the best place to post this but I'm not able to create a new post for some reason. Apologies if I'm in the wrong place.

Ok. This might be a stupid question but I'm a little confused on how the earning per pip are calulated. I know, sounds straight forward, right?

I've been trading with a practice account on Oanda for the last 4 weeks. I'm trying to work out my strategy so I can take home a certain amount each day, but my calculations aren't matching that of Oanda.

Here's the scenario

I'm operating an account with 50:1 leverage
Opening balance it AUD$10,000 (500,000 with leverage)

I make a Buy of 250,000 AUDJPY units at 82.65
I make a Sell of 250,000 AUDJPY units at 82.674
That's growth of 0.024 (or 2.4 pips)

250,000 x 82.65 = 20662500
250,000 x 82.674 = 20668500
profit = 6000
converting the 6000 profit from the 50:1 gives me $120.

Yet Oanda calculate the profit at AUD$72.8341 (after adding .2801 interest)

How can that be? What am I missing? Is it a leverage calculation? Is there a conversion back into Australian dollars that's causing the difference?

Any help would be appreciated.

Thanks

 

[Barramundi]

Yet Oanda calculate the profit at AUD$72.8341 (after adding .2801 interest)

How can that be? What am I missing? Is it a leverage calculation? Is there a conversion back into Australian dollars that's causing the difference?

Any help would be appreciated.

Thanks

You made 2.4 pips on $250,000 (or 25 mini lots). 2.4x25 = 60 yen.
The 60 yen when converted back to AUD equal the $72.

Leverage need not factor into the equation.

What is more concerning with this is, if you're taking a profit of just 2.4 pips, is that spread will eat away half of your profit, and I'd hate to think of how big your stop is in relation to your profit. It's off topic, but I think you may need to rework your general strategy, and the idea of taking a set amount home each day as with a regular job. Just my 2 bobs worth....

 

[Reyjay]

Thanks Barramundi. Your 2 bobs worth are welcomed and appreciated - thanks

The cals for the Yen conversion make sense.


I have a few newbie follow up questions about your comments:

1. You say that by taking a profit of 2.4 pips the spread will eat away half my profits. How so? How does the spread impact the amount of profit taken/lost. If I took a 4.8 pip profit would the spread only take 25% of my profit instead of the "half" at 2.4 pips? And where is the profit going exactly. As I write this I feel like these are easy questions and I'm missing something basic here.

2. Would my profit be less impacted if I made a single trade where I took a 4.8 pip profit versus 2 trades at a 2.4 profit. This "eating in to profit" thing has me confused.

As for my stop, yes, it's been large(ish). Approx 10 pips. I know that taking a 2.5 - 4 pip profit with a 10 pip stop doesn't conform with what others have written. But after 4 weeks of 3 -5 trades a day I've only had my stop triggered once. I'm using a combination of RSI, MACD and Bollinger and so far the strategy has worked fairly well. Is this naive?

Thanks again.

 

[Barramundi]

1. You say that by taking a profit of 2.4 pips the spread will eat away half my profits. How so? How does the spread impact the amount of profit taken/lost. If I took a 4.8 pip profit would the spread only take 25% of my profit instead of the "half" at 2.4 pips? And where is the profit going exactly. As I write this I feel like these are easy questions and I'm missing something basic here.

I find the spread on the AUD/JPY is around the 2.5-3 pip mark. Therefore for you to get your 2.4 pips of profit, you would need to capture a move of 2.4 pips plus the 2.5 pip spread, totalling around 5 pips or so. That's why I say it's eating half of your profit. If you are targeting 5 pips, you'd need a move of perhaps 7.5/8 pips, so in this case the spread would equate to about 30%. In either case, it is excessively high. You've got a lot stacked against you. Some traders say to keep the spread to less than 1% of your target, but that is in my view excessive in the other direction.

As for my stop, yes, it's been large(ish). Approx 10 pips. I know that taking a 2.5 - 4 pip profit with a 10 pip stop doesn't conform with what others have written. But after 4 weeks of 3 -5 trades a day I've only had my stop triggered once. I'm using a combination of RSI, MACD and Bollinger and so far the strategy has worked fairly well. Is this naive?

10 pips is a small stop, but it is still 3 times your average target value. Therefore you'd need a success rate of 75% just to break even. If you've taken about 80 trades and only had one stop out, that is truly exceptional - if you told me that and were trying to sell me something I'd say you were a liar! At the end of the day do whatever works for you. If your sim account is consistently going up, and you can replicate it live, then best of luck.
One other consideration is of course slippage. If you're risking say 3% of your account with a 10 pip stop, and you get hit by a major news announcement you forgot about for 50 pips, well there goes 15% of your account in a fraction of a second.

 

[Reyjay]

Ok, I understand what you mean re profit. Agreed about the AUD/JPY. It was the first pair I traded before I understood the attraction of a low spread. I now prefer USD/JPY or EUR/USD but still keep going back to my first pair from time to time. Point well made though. I know I'm trading in a tight time window but people must be leaving their cash in the market for quite some time for a spread to account for only 1% of their target. I'm way too fond (and inexperienced) to leave my cash out there that long.

Re my success rate to date, well I guess I'm not trying to sell you anything ;-)

And finally (hopefully), just back to my original questions. If I made 2.4 pips on 250,000 I understand how we reached 60 yen profit (25mini lots x 2.4) but how does the 60 yen equal AUD$72? When I convert 60 yen to AUD using any currency converter tool on the web I get approx 0.72. I know if I multiple this by 100 I arrive at the $72....but why the multiple of 100?

Thanks again....

 

[Barramundi]

Ok, I understand what you mean re profit. Agreed about the AUD/JPY. It was the first pair I traded before I understood the attraction of a low spread. I now prefer USD/JPY or EUR/USD but still keep going back to my first pair from time to time. Point well made though. I know I'm trading in a tight time window but people must be leaving their cash in the market for quite some time for a spread to account for only 1% of their target. I'm way too fond (and inexperienced) to leave my cash out there that long.

I believe the low spread needs to be considered along with the volatility of the market. Both the USD/JPY and the EUR/GBP have low spreads, but they don't move around as much as say the GBP/USD or the EUR/USD, therefore it's more difficult to get into a move x times the spread.
Those that are regularly targeting 200+ pips will be in the market for days/weeks/months? I guess. While this sounds risky, it is arguably less risky. If let's say they are targeting 200 pips with a 100 pip stop, for a risk of 3%, and they get stopped and suffer 50 pips of slippage, well that's a 4.5% loss. Compare that with the 15% loss in the example I gave you in your case. I understand you'd be trading between news announcements, but we are all subject to mistakes at times if we are not careful.

And finally (hopefully), just back to my original questions. If I made 2.4 pips on 250,000 I understand how we reached 60 yen profit (25mini lots x 2.4) but how does the 60 yen equal AUD$72? When I convert 60 yen to AUD using any currency converter tool on the web I get approx 0.72. I know if I multiple this by 100 I arrive at the $72....but why the multiple of 100?

My mistake, the 25 lots x 2.4 pips equate to 6000 yen. Notice that on the yen pairs there are only 2 decimal places, whereas on the others there are four. The pips are therefore worth 100 times as much. 6000 yen equates to about $72 AUD.
While the AUD remains near parity with the USD, most of the pairs are around $1 per pip per mini lot, but the JPY pairs are around $1.20 per and the Eur/Gbp is around $1.60.

 

[Reyjay]

Just checking that you meant 25 x 2.4 pips equates to 6000 yen, not 600. 600 yen is only 10 times as much, not the 100, and equates to about $7.2 AUD, while 6000 = $72. Yes?

 

[Barramundi]

Yes I did, mistake fixed!