More Featured Forex Brokers Open a free demo or live account with a featured forex broker. More AutoTrading Copy the trades of expert traders automatically on your own account. This testimonial arrived in my inbox from one of my existing clients and it supports my belief that we are on the right route. Congratulations on a stellar start with your newsletter. I am glad I bought a lifetime BWILC mentoring subscription because you will become so much in demand your tuition price will probably go way up. It is noteworthy that I only began consistently making any money in forex when I switched to the BWILC way. Even more noteworthy is that I'm making money in ever-increasing amounts as the BWILC techniques gradually become second nature. Thanks for rescuing me from my former dead-end efforts. I showed you how the marketing wizards trick people into trading with very high leverage, convincing them that it is a good thing. These people are often unaware of the devastating effect of leverage on their account. What is usually referred to as leverage is actually the margin required expressed as a forex if you trading all the borrowing power the broker will allow you to. Real leverage is determined by dividing your capital into the value of your positions. Real leverage can differ from trade to trade and increases with multiple simultaneous trades open positions. Margin required has no influence on your risk if you trade properly with modest leverage within your means and margin is not to be used as a risk calculating principle. I also want to re-cap on the most basic issue regarding leverage, that is, its proper calculation. Leverage is about borrowing money. To calculate leverage you must first know how much you have and then you must divide that into how much you are going to trade with the size of the lot you are going to buy, or in effect, borrow. I did refer to this in the Part 1, but only in passing and because this is important I want to make very sure you understand what I mean. They may also have missed the very important little paragraph on base currencies and currency quoting conventions. For real money dealers in banking dealing rooms these things are of paramount importance and it is second nature to them, but for some reason retail forex speculators see it as of minor importance and thus they make crucial mistakes in calculating their risk. You see, if you look at a leveraged transaction in the futures market or the stock market the calculation is really simply - as in the example above. If you live in India and you do a leveraged transaction on the Indian stock exchange you have rupees and your borrow rupees and you trade some listed stock on the stock exchange. It is a very straightforward calculation: But matters are not so simple in the forex market. The first minor complication is making sure you know what you have. In other words, in what currency is your account? I think many more US traders should diversify their trading account to other currencies as a way of mitigating the risk of having all their eggs in one basket. The problem with leverage calculations in foreign exchange is that you have to divide apples into apples. Consequently you must express the base currency of the currency pair you trade in the currency of your account. So we are back to basics. What the heck is a base currency? It is not the currency of your account. The base currency is the currency named first in the currency quotation. When we say EURUSD, euro is the base currency. When we say USDJPY, US dollar is the base forex. When we say the price of EURUSD is 1. But it became commonplace in the retail forex world to simply express such a transaction as having leverage of Doing this ignores the fact that explained are dealing with both apples and pears and just divide the 10K into K. It is forex interesting question why this has become the normal practice, and I would like to spend some time explaining why I think it has. Some history In December the US regulator, the CFCT, which in terms of the Commodity Leverage Modernization Act started to oversee OTC over the counter forex, issued new margin requirement rules. It seems to me that until then the marketing wizards advertised For example, while EURUSD traded at 0. The CFTC also issued rules during that the margin requirements of retail OTC OTC vs exchange traded forex brokers must be brought in line with those of the exchange traded forex futures. Their objections worked as we all know by now because margin requirements are still from as little as 0. What the regulator did achieve is to force the correct accurate calculation of margin as a percentage of the base currency contract amount. Understanding leverage exact amount that you trade should be pretty important, one would think. One would also think that retail traders that pay good money for trading advice, or training, from an e-book to a classroom course or home study course, will receive correct guidance in this regard. Unfortunately this is rarely the case. Explained amplifies the volatility in the market in the leveraged trading forex by the factor of the leverage. I am going to explain this problem with a story of two friends, Frank Marks and Buck Sterling. Frank is a teacher in history and doing his PhD on ancient civilizations and Buck is a computer programmer. They went to a free trading but Frank decided it was not for him. Slightly in awe Frank enquired of Buck how he was doing it and what the essence of the system was. At the top of the hour Frank rushes over to the Bureaux de Exchange and pays 1. Buck, who has now written a programme on his Easy Trading forex software, has just made 15, pounds worth of demo money overnight. Frank is becoming envious. Frank rushes off to the Bureaux de Exchange and buys another 5, GBP. Buck was correct; today Frank paid 1. By the time Frank is on the plane, Buck is launching his trading career with real money, funding his commission free, two pip spread on majors, The next few weeks Frank has a wonderful time in the UK and decides a week before his return to visit the Arlington racecourse and play the horses. The GBP is now trading at 1. At home a few days later he exchanges it his 10, GBP for USD at the airport for a rate of 1. Buck, however, should be a millionaire by now! First day back trading the job Frank finds Buck deeply engrossed in a computer program. His two trading screens are blank. A little taken aback Frank asks about the Paralytic Tsar, whether the Resistance is still building bases, and if the Hangman has been busy. The penny drops for Frank. Shocked Frank presses Buck for an answer. Later the two talk in more detail and the sad story unfolds. I made a few good trades with By the time the GBP hit 1. So I decided to increase the stakes a bit and I leveraged the 40K I had to place the stops a bit closer, because that trading how Idiot Money Management works. So Leverage placed the Idiot stops 15 pips away, initially. The market turns around and heads off in my direction just after having stopped me out. In fact, my third stop was taken out on a downward spike and 20 minutes latter two of my trades would have been in the money. Well call me the stop-out king. Leverage was taken out by only 5 pips. I realized it made a double top at 1. I sold big time. So what happened next? I am not too sure, at some stage I was 50 points up and then all hell broke loose and well, I had my stop well out of the way. I started realising that volatility with real money is a bit different forex volatility with demo money. My stops seemed like magnets drawing the market. Stopped out, market reverses and goes in my direction. Well, two days later I had 3K left. Money-for-Jam Capital Partners has the rest. Buck had to deal with the variance in his account created by market volatility and amplified by leverage. It would seem that Frank had a punt, and Buck lost money in an adverse market. In fact they were both gambling, the only difference being that Frank knew his win on the horses explained a matter of luck. It is part of our psychology that when we do well we ascribe it to our talent and when we do poorly we ascribe it to bad luck. Often it is just randomness, nothing more and nothing less. This story, with different shades but the same central theme, is repeated every day as aspiring forex traders burn out accounts. In addition to the fact that high leverage forces you to place close stops - the bread-and-butter revenue for the forex broker - and dramatically increases the chances of you becoming a victim of the very short-term trading of the forex market, it forex also costs you a leverage. Many traders think there is no cost in trading because the spread is not seen separate from either the pips they lose or the pips they make. This is wrong because a transaction consists of two parts. The cost, and then the profit or loss. The cost is the amount debited to your account equity if you closed a explained you have opened immediately, without a change in market price. You buy at 55 and if you sell immediately you would sell at Your cost to deal is 5 pips. You broker sold to you at 55 and bought from you at We can say the real market is already 5 pips against your position. But if you make a losing trade there is a 5 pip cost in addition to what you have lost due to an adverse price movement. The higher you are leveraged the more the spread costs you, bleeding money from your account Let me give you a practical example. They would be wrong. If you are un-leveraged, the only way in which you explained lose all your money is if the currency you hold loses all its value. From a cost point of view Frank Marks, when he bought his GBP probably paid a 15 pip spread at the Bureaux de Exchange. And so, the GBP value Frank holds is relatively stable. But the moment you add leverage it amplifies in your account, creating instability, as the story of Frank and Buck illustrated. But what I really want explained get to is this: If you take an active highly leveraged trader who does, say, 40 trades in a month leveraged at The maths looks like this: If a trader using this trading system breaks even he is a very good trader. But in the long run he will eventually lose because the leverage, besides whatever else it does, is draining his account. They can be the first 14 trades of the month. Therefore it is going to take him a lot longer to make up the losses. In the process, even though his transaction size is smaller, his leverage is still the same and too high because his margin is dwindling. If you really want to work out your return then you should work out your return, not expressed as a percentage of your margin but as a percentage of the total value and cost of explained transactions. Another consequence of leverage is that it amplifies the variance in your account equity. And this variance has nothing to do with sustained profitable trading. In the short term, days, weeks, months, some will even say a few years if you look at the result of your trading, there is a good probability that all you are seeing is random variance cloaked by the pretence of an intelligent trading system. It would be completely insane for Frank, after his visit to Arlington, to start a career as a forex. And we usually do this based on insufficient data. Novice traders who so dearly want to do well are especially prone to reading forex a short profit series that they have some edge and that they are on the brink of a long-term successful career in trading. Once they open their live accounts, probability rears up and bites them. I want to make this very practical. If you maintain explained high leverage you will have losses during the bad runs that probably exceed the profits during the good runs. What I am talking about is how variance in your account forces upon you a changed and negative mindset. You cannot concentrate on the market, which is what a trader should always be doing. Instead you are obsessed with the chaos in your account. What is the price out there, leverage are trading factors you should be aware of? Your energies are being utilised in completely the wrong place. In short, you have lost the sort of perspective you need in order trading trade successfully. Variance of this magnitude due to leverage not only robs your account of money; it robs you of leverage ability to trade sensibly. Can you make money with low-leveraged trading? Is it worth your while? I have developed a strategy that provides an edge. I call it my 4X1 strategy: Here is a fascinating true story from one of my clients. When he started out with my mentoring programme his answer to the question - Assuming that you have struggled until now, what would you ascribe this to? Most of my struggles have been believing what I have read on trading systems. You are the first to expose this folly to me. That was in January Kind regards Dirk D. Top Traders on Twitter. Subscribe to receive free offers and new features - Read Latest Newsletter Email:. Read IronFX User Reviews. Choose from a multitude of leverage traders. Open a free demo or live account with a featured forex broker. Copy the trades of expert traders automatically on your own account.
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