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How to Manage Risk while Forex Trading

Discussion in 'Forex Basics Boot Camp - Fx Articles by Pharaoh' started by Pharaoh, May 12, 2008.

  1. Pharaoh

    Pharaoh 1st Lieutenant

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    Personally, I don't use MBT. My broker gives me 200:1 (but I don't ever max out my available margin).

    If you follow my advice, it doesn't matter if your broker allows 1:1 or 500:1. Calculate the amount that a 1 pip move will cost you on a pair. Then, based on your stoploss, account size, and maximum percent of your cash you wish to risk, you can determine the maximum number of lits/minilots/microlots that you can trade.

    100:1 and 200:1 are the most common amounts of leverage for retail forex brokers. Just because your broker lets you control tens of millions of dollars doesn't mean you have to use all that leverage.

    Leverage is a big sledgehammer. Swing it slowly and carefully or you'll hurt yourself.
     
  2. Sir Pipsalot

    Sir Pipsalot Former FPA Special Consultant

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    Leverage can be a very powerful tool as it can allow you to work with a large chunk of cash without having to deposit it all into your brokerage account. If you had $100,000 USD to put into an account planning to max it out at 50-1 leverage... you could trade the same volumes and risks depositing $50,000 into a 100-1 leveraged account and keeping the other $50k in the bank. Or on the high extreme, do 400-1 leverage with $12,500 exposed in the account and $87,500 in the bank. The great thing about this last setup is you're limiting yourself to about a 12% maximum loss before you're forced to reconsider your strategy and refund the account. Also, if your broker (God forbids) goes under, you're not stuck with all of your capital lost.

    Leverage is a powerful, but potentially deadly tool. If wielded improperly or with inexperience, I agree it does MUCH more harm than good. However, I would much prefer to have access to higher leverage to have the flexibility to set my own agenda.
     
  3. JeffNLisa

    JeffNLisa Private

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    No, you are incorrect. What the leverage of a broker is has NOTHING to do with a trader wiping himself out. NOTHING. It has EVERYTHING to do with a trader understanding what it means to risk 3% of his account. The math is not hard to do, and a trader who does not know how to do it has no business trading.

    Aside from that, I know of no broker that does less than 100:1 leverage except that they have a minimum opening deposit of something like $50,000 or more.

    For bucket shops anyway, it is in the broker's best interest to get people to use higher leverage, as high as possible, and persuade traders to max out that leverage for the very reason that it's a stupid thing to do. It's profitable to a bucket shop, BECAUSE it takes all the trader's money!

    100 pips only wipes out their account if they put too much on the trade. How much the broker would ALLOW them to put is irrelevant.

    How about a trader taking responsibility for understanding what he's doing before putting his entire account on a trade with a 100 pip stop loss?
     
  4. pcindia

    pcindia Private, 1st Class

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    hi
    - banks use nothing more than 2% margin. If you apply for a job as a trader and state that you use 4% margin, expect outright rejection.

    - 10% margin utilization can bring in a drawdown of 60% in no time.

    - Keeping a diversified portfolio where you spread your money over different pairs, is advisable, even though you might find lesser enteries. Examining less traded pairs also is a good idea .

    - If you can't set stop loss mathematically, then consider using it on time. Let's say, after 48 hrs. you will close , whatever the result be.

    best regards
     
  5. ace king

    ace king Recruit

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  6. acongfx

    acongfx Recruit

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    Good article dude... very informative. remind me when i had a margin call for the 1st trade:p
     
  7. forextips

    forextips Recruit

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    Good Advice

    Thank you pharaoh for this thought provoking and expository thread.

    If I have had this few months ago, I wouldn't have lost my hard earned dollars. Anyway, it is a great lesson and i thank God for everyone that has contributed to these thread.

    Newbies like me will find it very useful.
     
  8. kcgeorge

    kcgeorge Recruit

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    reply to your advice pharaoh

    That was a nice advice,and am going to work towards that 'cos before now i dont put much of that into consideration myself.
    Thanks.
     
  9. piphog

    piphog Private

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    That's ridiculous, you wonder why 99% of retail forex traders fail? Because they use 100:1 leverage and think they are the **** because they can make a $100,000 trade with $1,000. You should not even be trading unless you have $10,000 and can open a mini-lot position without leverage, these brokers are making crazy bucks off of you people who try to make a living or start a living by trading on insane leverage. Anything more than 10:1 is incredibly irresponsible and you will never succeed at such degrees of leverage. If you are with a broker that does NOT allow you to adjust your leverage, you most certainly have a short future in forex trading, or a long future with a lot of lost money.
     
  10. realsbd

    realsbd Recruit

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    this is a great idea for people that are eager to make money

    i read this article[pharaoh] and i really appreciate it because this is the right message, i advise one of my friend about the eager of making money which prompt him to put all is money in a news like non farm payroll. i have recommend him to read this article because it is very good.
     

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