Leverage and Trade Size

[eudamonia]

I meet with a group of local traders about once a month to discuss various things. We had several folks there who astounded me with their lack of knowledge. This is not to be boastful but I realize perhaps I know more about trading than I even realize. Either that or the "average trader" is dumber than I realize. Either way it was quite a realization.

That being said I'm going to post a few threads with things every trader "should" know and mostly regarding risk and understanding your edge:

1) Leverage and Trade Size Concepts
a. Leverage is the maximum size your broker will allow. For stocks most trading is unleveraged (unless you trade options) or at most 5:1 (for daytrading). Futures are typically 25:1 (for overnight) and Forex is 50:1 (used to be 100:1).
b. Thus if you have a $10,000 account 50:1 leverage means you can control up to $500000 worth of a currency (50X). However, at this leverage each pip is worth $50. That means a single 200 pip move against you would wipe out your entire account. Certain currency pairs have been known to move 200 pips in less than an hour. The GBPJPY might do that in 5 minutes!
c. If you are risking 1% on your $10,000 account that means you risk $100. If your stop is 10 pips that would mean you are using 10:1 leverage (assuming you are buying $100,000 worth of currency). If your stop is 100 pips that means you would be using 1:1 leverage (assuming you are buying $10,000 worth of currency).

[bredin]

I keep running into guys that talk of trade size in terms of margin requirements: "I open a trade with 5% margin", etc.

I usually reply with something like "I dont understand you, how much risk are you taking?"

The usual response to my question is "??"

I get the feeling from this that few people actually understand how much they stand to lose if things go "not well".... and knowing if they are overleveraged or not....

A FB friend of mine keeps posting large % gains over very small pips (even smaller than TRO), and unsurprising to me (but surprising to her) was handing back all her gains over a month (38%!) in just three bad trades.... she blamed trading at the wrong time of day

G.

[Humble]

.... she blamed trading at the wrong time of day

Could have been worse!

[trueblueTEX]

FB??

[ajaymein]

FB??

Facebook

[trueblueTEX]

OK, there was another expression I was aware of. If it was the other one, I was gonna ask for her phone number.

[ajaymein]

Hahahaha...in that case, I want the number as well...I'll pip her all day long

[MightyOne]

FB??

The only thing that you need to know about Facebook is that you shouldn't sign up

[pablo101]

I'm slow. FB as in uck muddy? What are you stars talking about?

[ZEN]

OK, there was another expression I was aware of. If it was the other one, I was gonna ask for her phone number.

This is good, this is a good one!!!