New leverage ratios
Hi Everyone!
I had to come back again and talk about leverage levels because I'm more than a little miffed, in fact I'm seething with rage at Gensler's proposals regarding lowering the leverage ratios to 10:1.
I've tried to read through most of the posts here and agree with most of them and don't understand others.
One in particular that caught my eye was a gentleman that said he never traded higher than with 10:1 leverage levels. I think there were a few to this effect and others saying that anything over 10:1 was gambling. I don't really agree with that. The only reason that you would use such a low leverage is if you wanted to use a very large stop level and be able to ride out all the retracements that might happen on the way to making a profit. I'm hoping that they're not confusing leverage levels with margin levels because using anything higher than about 5 to 10% margin gets darn risky if you don't know what you're doing.
I am a day trader and will always be one. I am not interested in riding out any kind of retracements nor taking part in the carry trade.
The forex isn't outright gambling but it is not "investing" in any sense of the word. It is speculation, pure and simple. Nothing more, nothing less. Because it is rampant speculation it is recognized as one the most if not the most risky form of "investment". Being the most risky form of making money we should expect to get a very good return on our money and 10:1 just doesn't cut it.
I know that this may not be the place to do it but I think a refresher on leverage levels is in order. Now, I think about leverage levels in a little bit of a different way and after I'm finished I invite feedback. Please be kind and constructive as I am a delicate flower and don't like being yelled at. If you do I'll turn around and become a nasty bast***.
I'm going to be dealing only with mini accounts, only the EUR/USD with a fictitious broker who gives you a margin call when your capital gets down to 50%. We are going to go back to the good old days when you could buy one mini lot for either $25, $50, $100, $200, etc., for clarity's sake.
In this mini account let's say we have $16,000 and you can choose leverage anywhere from 400:1 down to 10:1.
What leverage does is two things and they are in an inverse relationship.
Firstly, it determines how much you pay per lot and subsequently your profit or loss PER PIP.
Secondly, it determines how far away you can set your stop levels before you get a margin call.
You're a newbie and have visions of sugar plums floating in your head and think 400:1 leverage is going to make you a millionaire overnight. Quite the contrary. Nothing but a very nasty trap for the unwary. If you come across a broker who offers you 400:1 leverage, tell them in no uncertain terms what you think of them, DO NOT SIGN WITH THEM, run as fast as you can away from them and tell all your friends to avoid them like the plague. Because they're nothing but the worst scam artists.
I'm going to be using an extreme example just so that it will be a little clearer. Hope I won't be talking down to anyone because that's not my intent. I just want to illustrate what that little so-and-so Gensler is proposing.
Example #1-400:1 leverage
Investment $4000, buys 160 lots at $25 per lot, profit/loss $160 per pip.
Usable margin $12000. Margin left till margin call, $4000
Now we have $4000 of wiggle room till we get a margin call from our friendly neighbourhood broker which means at $160 per pip we can only set a stop at less than 25 pips. At 25 pips we get a margin call because we're down to 50% of our account. See, higher leverage, less wiggle room.
At 200:1, using the same numbers, we can obviously only set less than a 50 pip stop. Little better, almost usable, but not great. 50 pip retracements are not unheard of.
At 100:1, using the same numbers we can almost set a 100 pip stop before a margin call. Fairly workable if you're a day trader and are happy scalping for the 10, 20, 30, 40, 50 pip profits. Sometimes you luck out with the 100 pip profits. That's a good trade as far as I'm concerned. In and out of the market. Want nothing to do with retracements or rollovers at market close. Wham, bam, thank you maam! Takes my money and gets ready to fight another day. Voila! Mois!
Now, Gensler's proposal; 10:1 leverage.
Using the same numbers with a $4000 investment you can buy, ta da! all of four lots but you can set a 999 pip stop before a margin call. I must be special! Talk about lucky me! WOW!
Now, if you have oodles of cash and you are other than a day trader you want to be able to set large stops so as to ride out the retracements and there is nothing wrong with that but not my style.
The whole point of this diatribe is that if Gensler gets his way and sets leverage at 10:1, firstly, each lot will cost us MUCH MORE. MUCH, MUCH MORE! Less profit per pip but we can set humongous stops to our hearts content. What an advantage! Is he ever a nice guy! Always thinking of the underdog. Yeah, right. I hope you're all noticing the hint of sarcasm that I'm subtly trying to sneak in here and there.
It will make the domestic forex industry the exclusive domain of the very rich, who also probably will not put up with it and who in all probability will also elect to trade offshore.
Gensler isn't doing anyone any favours. If his leverage changes go through it will, without a shadow of a doubt, kill the domestic forex industry overnight and I, for one, will definitely trade in another jurisdiction.
There are bigger issues here. It's not so much about us as individual traders but really the retailers that are at serious risk of going out of business and having to lay off an enormous number of good, reasonably honest, hardworking people who don't deserve such a terrible fate. Especially in these times of high unemployment and lack of job security and scarcity. Why that little friggin' jackass would want to risk that, I have no idea.
This is really about the survival of the domestic forex industry.
Fight this tooth and nail with everything you've got. This really is serious sh**! Much worse than that bloody crap that came down from those bastards at the NFA!
I hope this helps a little bit with leverage. Please give me feedback if you think it appropriate.
I really do wish all of you the very best in 2010.
Health, happiness, abundance, prosperity and of course God's blessing to you all.
Sincerest regards,
Armin R.
