Pros and cons of trading markets

[xelite777]

If you're applying 50:1 leverage to 1% of your account, then you're risking 50% of your account. So I would say leverage does matter.

No!

Most Forex platforms are set at 50:1 leverage, by the broker. That simply means your FX broker allows you to control 50 dollars with only 1 dollar.

Now suppose you have $5,000 in your Forex account. You buy 1 mini EUR/USD lot (10K, so 1 pip is worth $1) and your stop is 100 pips ($100).

What is your leverage?
Answer: 50:1 (Remember, the leverage is set by your broker and does not change)

What is your risk?
Answer: 2% (You have $5,000 and you risk only $100 = 2%)

So as you can see, I am trading with a 50:1 leverage and yet my risk is only 2%. In fact my FX broker could set the leverage at 500000:1 and it wouldn't make a difference, I risk 2% or less per trade, period.

As I said before, most FX traders have a hard time understanding this simple concept.

 

[AlphaRocks]

Yes but then those threads would be scattered all over this website rather than sitting in one nice little spot here in Trading.

This website has some really big threads, including some on complete nonsense like "Why is the obvious not obvious?"

You can still have multiple threads within "Trading" forum, but I'm sure you already knew that.
I know this site has huge threads that go multiple years, but most threads tend go off on tangents after 10 or 15 posts; and long threads are hard to follow and find what you want, unless you know specifically what you're searching for (unlikely for a newby)... let's see how this one fares.

 

[rubb]

There is no such thing as "crazy" leverage. I trade the Forex with 50 to 1 leverage but I only risk less than 2% on each position.

In fact the amount of leverage offered by your broker does not matter a bit, what truly counts is the percentage of your capital you allocate to each trade.

Most traders have a hard time understanding this simple concept.

Very interesting to read your thoughts on this. I honestly don't agree with you. I suppose there are more than 1 ''schools of thought'' about the leverage issue

let say you deposit 1k USD.

Having a leverage of 100:1 will allow you to control 100 k in a trade (ex . 1 lot on EURUSD), while with 500:1 you may control 500 thousand in the market (ex. 5 lots EURUSD)

So, even in simpler words , with more leverage I can use bigger positions on the same margin.

Leverage always matters, it boosts your equity, higher leverage is bigger positions on margin, so boost on profitable trades and (this one is bad) boost again on loosing trades, imo one must always be careful on the leverage percentage used.

For instance, I would use higher leverage on little accounts so I can ''plunge'' into a big position with really tiny capital (buy or sell 1MM in the market without actually having the million in my account). And viceverse, if I had a million in my account I would use 1 to 1 leverage as I would have the margin required to take big positions.

Now, the part I partially agree with you is the risk per cent part you mentioned. But risking 2 per cent, 5 per cent or 10 per cent per trade is defined by you and your personality.

I can think of several combinations of leverage and risk per trade that would throw several different answers.

I think, like almost everything in life, it goes down to a matter of opinion and perspective. For instance maybe you are trading with 500k account and your ''idea'' of big position is to control 300k at market with SL @ 50 pips, while I may be trading with a 5k account and my 'idea' of a big position or ''full line'' as I like to call it is to control 500k at market with tigher stops, just to give an example of course.


What do you think

 

[rubb]

Over-leveraging is how many trading accounts get blown up.

It can alse be a way to go from a little account to a big one in less time Depending on the trader skills and goals, of course

 

[kut2k2]

You can still have multiple threads within "Trading" forum, but I'm sure you already knew that.

Not without violating the rule posted right at the top of the Trading forum. A thread that is only about stocks should be in the Stocks forum, and so on. And eventually such a thread posted in Trading forum will most likely be transferred to where it belongs.

Besides what do you expect me to do at this point? Cancel (how exactly?) this thread and start all over just because *you* don't like the arrangement? Not happening.

 

[kut2k2]

I would say leverage does matter.

No!

... As I said before, most FX traders have a hard time understanding this simple concept.

Con (of trading stocks):

No leverage (or 2 to 1 at best), so a large starting capital is required. For example if the trader makes 15% a year with his system, he will need to have $200,000 just to earn $30,000 a year (taxes not included!).

For me it's a big no no!

Looks to me like you're the one confused on leverage. You won't trade stocks because they offer little or no leverage, but then you argue the amount of forex leverage doesn't matter.

Let's agree that leverage is a factor that can be both pro and con. It offers the opportunity for great reward but also risk of great loss.

 

[xelite777]

Very interesting to read your thoughts on this. I honestly don't agree with you. I suppose there are more than 1 ''schools of thought'' about the leverage issue

Nope.

In trading and as far as leverage is concerned, there is only reality and...fantasy.

let say you deposit 1k USD.

Having a leverage of 100:1 will allow you to control 100 k in a trade (ex . 1 lot on EURUSD), while with 500:1 you may control 500 thousand in the market (ex. 5 lots EURUSD)

Correct, Rubb.

But once again, the leverage is set by your broker and does NOT change. You cannot trade with 500:1 leverage on Monday and 200:1 leverage on Tuesday, for example.

The ONLY thing you can control is the percentage of your capital that you will allocate to each position, period.

And once again, there is no such thing as crazy leverage, YOU, and only YOU decide how much you are willing to lose on each trade (via your stop), the amount of leverage offered by your FX broker (be it 20:1, 50:1 or 1 million to 1) is totally irrelevant here.

(You guys in Mexico did good at the Soccer World Cup against Croatia by the way, but that's another story )

 

[xelite777]

Looks to me like you're the one confused on leverage. You won't trade stocks because they offer little or no leverage, but then you argue the amount of forex leverage doesn't matter.

??

There is absolutely no confusion, all I am saying is that the trader needs to have a very large starting capital to make a living trading stocks (because stock brokers offer zero leverage).

On the other hand the same trader can turn a relatively modest starting capital into hundreds of thousands using highly leveraged financial instruments like Futures or Forex, assuming he has a winning trading system.

Let's agree that leverage is a factor that can be both pro and con. It offers the opportunity for great reward but also risk of great loss.

Yep.

But nothing new under the sun here.

 

[rubb]

Correct, Rubb.

But once again, the leverage is set by your broker and does NOT change. You cannot trade with 500:1 leverage on Monday and 200:1 leverage on Tuesday, for example.

The ONLY thing you can control is the percentage of your capital that you will allocate to each position, period.

And once again, there is no such thing as crazy leverage, YOU, and only YOU decide how much you are willing to lose on each trade (via your stop), the amount of leverage offered by your FX broker (be it 20:1, 50:1 or 1 million to 1) is totally irrelevant here. )

Ah, I get your perspective now. You are totally right.

With this being said I believe I did not made myself clear when I wrote ''Crazy leverage''. Let me rephrase that:

I meant crazy leverage offered by the brokers when you open an account . I have seen brokers offering up to 1:500 . That is A LOT of leverage specially compared to stock trading where brokers usually offer non or little leverage and bigger minimum margin requirements.

This is why I wrote ''crazy leverage'' as a pro and as con. IMHO it can be a good thing if you actually know what are you doing, if not. you can blow your account super fast.

BTW , now that I think more deeply about this, I think this is a key reason why newbies decide to start trading spot currency markets, think about it...

Little minimum requirements for an accoun to be open and HUGE leverage offers. No wonder why there is a belief out there that forex trading is harder than any other market. They are inviting the uninformed and under capitalized people to gamble. No wonder why there are so many uninformed traders blowing their accounts in a blink of an eye. Interesting.

(You guys in Mexico did good at the Soccer World Cup against Croatia by the way, but that's another story )

Yes, I honestly did not expect that. Next game will be very difficult vs Holland. I was rooting for Spain and Italy tbh, very weird World cup so far imo, full of surprises

Regards

 

[Visaria]

Stocks:

Con:

Can go to zero overnight and could double overnight too.

Probably why you can only have 50% margin on them.