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Chapter 34, Part II. Overleveraging and Transaction Costs. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Let’s suppose that you’re newbie day trader and you apply just a 50 pip stop-loss in most of your trades. You’ve checked it by the market’s volatility and come to the conclusion that for intraday charts this stop is sufficient. You’ve opened mini account with 1000$.

    TASK #1 – you have opened a couple of mini lots at EUR/USD with average stop at 35 pips. If your stop has been triggered by the price – what part of your assets you have lost?

    Well, first we need to calculate the margin, I suppose:

    - Two mini lots are 10,000x2 = 20,000. Hence my leverage is 1:20;

    - 0.0035*20*100 = 7%!

    What a surprise – I’ve lost 7% right at start-up trade, unbelievable. But this was just a bad day. Probably. I’m ready for a return match, but I want to not just return to breakeven, but also to make a profit. So, probably I need to enter with 4 mini lots now…

    Commander in Pips: Right. Let’s see what will happen next…

    TASK #2 – you have opened four mini lots at EUR/USD with an average stop at 30 pips. But you’ve missed the time of a big US GDP release, so your stop has been triggered on fake out. What part of your assets you have now lost?

    My assets after first trade are 1000-70 = $930.

    Leverage = 4*10,000/930~43:1;

    Loss = 0.0030*43*100 = 13%

    Account balance now is 1 000-70-120 = 810$

    Commander in Pips: So, in two trades you’ve lost 1/5 of your total assets. If you remember our major approach is to not risk more than 1.5% in every trade. So, you should have lost just 3%, but instead you’ve lost 20%!
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