Trading large accounts on margin

M

mortysill

A theme in chat rooms I have noticed recently is account closure because traders have been too successful.

Oanda seem to be keen on doing this at the moment. Reading between the lines I suspect the 'victims' have been scalpers using enormous leverage. The brokers' excuses include traders not staying in a trade for more than 90 minutes and only taking a few points per trade.

I have also heard (perhaps on ET) that the common initial funding for new accounts is $5,000 and that most blow-up within 3 months.

Putting this altogether, who do the small professional funds trade with? (<$10m MUM - <url>http://www.barclaygrp.com/info/perf_ranks/200610/cta/currency_traders.html </url>). If a $5m fund trades 500 lots for 40 pips and then covers after 45 minutes, how would the broker lay off the risk and to whom? There would have to be a large number of blown-up newbies to cover trades of this size!

I spoke with a hedge fund manager, at one of the global banks, recently and he told me he does not have access to leverage. Do the currency funds, listed on the Barclay Group web site, have access to leverage?

Is the retail FX market a house of cards?

Apologies for all the questions. I have not seen this topic discussed whilst I have been on ET. If there is a thread answering these questions could you direct there?

Regards
Morty
 
The volatility itself is a product of stops, and stops on minimially funded accounts are fodder for volatility. So a underfunded account + stops + volatility, and you have recipe for failure 95% of retail forex accts.

And notice how the bucket shops advertise 400:1 leverage, add this to the formula, and you might as well throw your money away.

If I was trading a million dollars in forex, would I sweat it if I was down 10K on a unleveraged position probably not.

Some traders will just leave a unleveraged position alone with the trend. Give it enough time, and the position will show profit given the volatility.

The more money you trade the less leverage is offered to you. On absolute terms, the money is minimal on small accounts, and a huge leveraged position on 10 million US will only get you 10 times, not 100 times in leverage.
 
Quote from Spectre2007:

The volatility itself is a product of stops, and stops on minimially funded accounts are fodder for volatility. So a underfunded account + stops + volatility, and you have recipe for failure 95% of retail forex accts.

And notice how the bucket shops advertise 400:1 leverage, add this to the formula, and you might as well throw your money away.

If I was trading a million dollars in forex, would I sweat it if I was down 10K on a unleveraged position probably not.

Some traders will just leave a unleveraged position alone with the trend. Give it enough time, and the position will show profit given the volatility.

The more money you trade the less leverage is offered to you. On absolute terms, the money is minimal on small accounts, and a huge leveraged position on 10 million US will only get you 10 times, not 100 times in leverage.
More...

Many thanks.

I suspected some leverage was available because of the small funds' Sharpe ratios.

Do you know how the brokers manage risk? Surely it can't be just down to relying on new accounts blowing up?

Morty
 
Morty,

A lot of retail brokers do just that in fact and wait for the blow ups. SOme brokers can keep up to 80%+ of the initial deposit within the first month or two.

Where they do limit their downside risk is by just laying off good traders and try to stop the firm's own bleeding on good traders.

High leverage and Joker Broker games play a huge factor in a lot of blow ups but a good deal of blow ups are self-inflicted.

Institutional managers typically trade low leverage on longer term trades and may gear up on short term trades only because they can manage the risk effectively to some degree. Most managers that I know don't go over 5 to 7X leverage (20:1 or 14:1)

Anyone trading at 50:1 or higher needs to have some good equity for drawdowns or they need to limit the risks by keeping stops within check. Both of which mean the money at risk is at real risk.

Happy Hunting
 
Quote from RapidFireFX:

Morty,

A lot of retail brokers do just that in fact and wait for the blow ups. SOme brokers can keep up to 80%+ of the initial deposit within the first month or two.

Where they do limit their downside risk is by just laying off good traders and try to stop the firm's own bleeding on good traders.

High leverage and Joker Broker games play a huge factor in a lot of blow ups but a good deal of blow ups are self-inflicted.

Institutional managers typically trade low leverage on longer term trades and may gear up on short term trades only because they can manage the risk effectively to some degree. Most managers that I know don't go over 5 to 7X leverage (20:1 or 14:1)

Anyone trading at 50:1 or higher needs to have some good equity for drawdowns or they need to limit the risks by keeping stops within check. Both of which mean the money at risk is at real risk.

Happy Hunting
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Thank you for taking the time to answer,

Do you know what the brokers actually do to lay off risk? In a very simplistic system, the broker could, for example, go long automatically when the trader went long. If no leverage were employed then a successful trader would have the broker's winnings transferred into his account less the spread. If the trader lost, equivalent funds would be transferred to the broker to cover his loss. The broker's profits would all come from the spread.

This doesn't work, of course, if leverage is used by the trader and the broker doesn't have a similar facility. Do brokers have access to leverage and if so what is the instrument? Are there FX CFDs?

If only there were an FX brokers online course?*!!

Regards
Morty
 
They have several ways in which they can layoff risk. Some shops are capable of matching buys and sells and grabbing spread in active times. In less active (and less volitile) times, they may simply trade back to a bigger broker/bank and immediately exit the risk.

The second way is how a lot of large banks even handle some of their risk.

Another way is to look to foffset through futures.

There are a few up and coming firms who actually provide a risk management platform/pricing feed that brokers can subscribe to and pass risk over in an STP.

Your questions are very similiar to many others here in ET. There's a blogsite out there that tries to distinguish between dealing and non-dealing brokers. You might want to google and check that out. It is a bit bias but the experiences sound pretty life like.

Happy Hunting
 
Thanks.


GBPJPY has been a gold mine today: I missed the move in London but caught 239.93 to 239.73 and then part of the next leg down 239.30 to 238.77. I contemplated going short again around 239.30 but settled with my 73 pips. Of course it then plummeted to 237.42!

Best wishes
Morty
 
Quote from mortysill:

A theme in chat rooms I have noticed recently is account closure because traders have been too successful.

Oanda seem to be keen on doing this at the moment.
More...


I've never heard of this happening at Oanda.......can anyone else substantiate this claim? You would think if large successful traders accounts were being forcibly closed, there would be a big stink about it somewhere.
 
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