Which leverage do you like?
1:10000000
Forum on trading, automated trading systems and testing trading strategies
Something Interesting in Financial Video November 2013
newdigital, 2013.11.01 06:47
188. Trading the E Mini S&P Futures Contract=============
Why Leverage is the Biggest Advantage and the Biggest Disadvantage
The main advantage and disadvantage in futures trading is the leverage involved. (You can hold a very large amount of a commodity for a small deposit so any gains and losses are multiplied.) This is the main difference between futures trading and, say, speculating with stocks and shares.
For example, you have $3000 to invest. You could buy $3000 of shares in an Oil Mining Company, buying them outright. Or this $3000 may be sufficient margin (a goodwill "security bond") to buy a couple of Crude Oil futures contracts worth $30,000.
The price of Crude Oil drops 10%. If this effects the price of your mining stocks by 10%, you would lose $300 (10% of $3000). But this 10% fall on the value of your Crude Oil futures contracts would lose $3000 (10% of $30,000). In other words, all of your initial stake would be lost trading the futures rather than only 10% of your capital trading the shares.
But, with Stop-Loss Orders you will always know how much money you are risking in any trade.
A Stop Loss Order is a pre-determined exiting point which automatically exits your position should the market go against you. In the above example, you may only decide to risk $1000 on the Crude Oil futures contracts. You would place a stop loss just under the market price and if the market dropped slightly, your position would be exited for the $1000 loss.
So Leverage is great if the market goes in your predicted direction - you could quickly double, treble or quadruple your initial stake. But if the market goes against you, you could lose a lot of money just as quickly. All of your initial stake (your margin) could be wiped out in a few days. And in some cases, you may have to pay more money to your broker if the margin you have put up is less than the loss of your trade.
How to Protect Profits with Stop-Loss Orders
As mentioned above, losses can accumulate just as quickly as profits in futures trading. Nearly every successful trader uses Stop-Loss Orders in his trading to ensure profits are 'locked in' and losses are minimised.
How do Stop-Losses work?
A stop-loss is usually placed when a trade is entered, although it can be entered or moved at any time. It is placed slightly below or above the current market price, depending on whether you are buying or selling.
For example, say Pork Bellies is trading at $55.00 and you think prices are about to rise. You decide to buy one Pork Bellies contract, but you don't want to risk more than $800 on the trade. A one-cent move in the market is worth $4.00 on a pork bellies futures contract so, therefore, you would place your stop at $53.00 (200 cents away from the current price x $4 per point = $800).
You can also move a stop-loss order to protect any profits you accumulate.
Taking the Pork Bellies example: Two weeks later, bellies are now trading at $65.00. You are now up $4000 (1000 cents of movement x $4). To protect these profits, you can raise your stop-loss simply by calling your broker. Say you place it at $63.00, you have locked it a profit of at least $3200 and now risk $800 to your new stop level.
But what if the market went against you? Going back to the original position when you bought at $55.00 with a stop at $53.00: what happens if the market suddenly tumbles down to $51.00 during the day? Your trade would automatically be 'stopped out' at your stop level of $53.00 for an $800 loss. The fact that the market closed the day at $51.00 is irrelevant as you are now out of the market. (Had you not used a stop-loss and viewed the market at the end of the day, you would have large losses on your hands!)
The same would happen if the market reached $65.00 and you had raised your stop to $63.00: If the market fell from here, say to $62.80, you would be stopped out at $63.00 and would have a profit of $3200. Even if the market suddenly reversed here and rose to $79.00, this would be irrelevant as you are now out of the market.
This last example would be annoying because if you hadn't been stopped out, you would now be $9600 in profit. But you were stopped out at your $63.00 stop. The market only went 20-cents under this and reversed!
It is for this reason that some traders don't use stops: they have been stopped out in the past JUST when the market was about to go their way.
The solution is not to abandon using stops as this is EXTREMELY RISKY. The solution is to use stops effectively.
(In fast moving markets it is sometimes impossible for brokers to get your orders exited exactly on your stop loss limits. They are legally required to do their best, but if the price in the trading pit suddenly jumps over your limit, you may be required to settle the difference. In the above scenario, the price of Pork Bellies could open trading at $62.50, fifty cents through your stop at $63.00. Your broker would have to exit your trade here and, in fact, you would lose $1000, $200 more than your anticipated $800.)
Where to Get Market Information
Commodity prices can change direction much faster than other investments, such as company stocks. Therefore, it is important for traders to stay on top of market announcements. Professional traders may use a wide number of techniques to do this, using fundamental information and technical indicators.
Fundamental data may include government reports of weather, crop sizes, livestock numbers, producer’s figures, money supply and interest rates. Other fundamental news that could affect a commodity might be news of an outbreak of war.
Technical indicators are mathematical tools used to plot market prices and behaviour patterns on a graph. These can include trend lines, over-bought and over-sold indicators, moving averages, momentum indicators, Elliott wave analysis and Gann theory.
Some traders use just one of these basic methods religiously, disregarding the other completely. Others use a combination of the two.
Many investors, especially smaller investors, devise their own trading method or purchase one from another trader. (Be careful not to buy a system that has been over-optimised and curve-fitted to fit past data. Many times, I have seen systems claiming 80%+ winning trades on past data, but when I have run the system on current prices, the results are breakeven at best!)
They normally paper trade the method (i.e. they follow the markets but only pretend to place the trades) for a few months to make sure the method works for them before placing any actual trades.
Tracking price charts and keeping up with fundamental data is a difficult full-time job – some large organisations employ dozens of staff to follow market moves. And some traders, especially those on the market floor, may only hold a position for a few hours or even minutes.
So where does this leave the small, independent investor who would like to trade in the lucrative futures markets?
Many trade on a daily or weekly basis, i.e. they note or 'download' market prices at the end of each trading day and make their decisions from this data. Often, they will leave a trade on for at least a few weeks (possibly months). This is a much SAFER way of trading because any fluctuations are ridden out and less panic-buying or selling is involved.
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Forum on trading, automated trading systems and testing trading strategies
newdigital, 2014.01.23 11:01
Margin Call (adapted from dailyfx.com article)
- A Short Introduction to Margin & Leverage
- Causes of Margin Calls
- How to Avoid Margin Calls
To get a grasp on what a margin call is, you should understand the
purpose and use of Margin & Leverage. Margin & Leverage are two
sides of the same coin. The purpose of either is to help you control a
contract larger than your account balance. Simply put, margin is the
amount required to hold the trade open. Leverage is the multiple of
exposure to account equity. Therefore, if you have an account with a
value of $10,000 but you would like to buy a 100,000 contract for
EURUSD, you would be required to put up $800 for margin in an account
leaving $9,200 in usable margin. Usable Margin should be seen as a
safety net and you should protect your usable margin at all costs.
Causes of a Margin Call
To understand the cause of a margin call is the first step. The second
and more beneficial step is learning understanding how to stay far away
from a potential margin call. The short answer as to understand what
causes a margin call is simple, you’ve run out of usable margin.
The second and promised more beneficial step is to understand what
depletes your usable margin and stay away from those activities. In risk
of oversimplifying the causes, here are the top causes for margin calls
which you should avoid like the plague (presented in no specific
order):
- Holding on to a losing trade too long which depletes Usable Margin
- Overleveraging your account combined with the 1st reason
- An underfunded account which will force you to over trade with too little usable margin
What Happens When A Margin Call Takes Place?
When a margin call takes place, you are liquidated or closed out of your
trades. The purpose is two-fold: you no longer have the money in your
account to hold the losing positions and the broker is now on the line
for your losses which is equally bad for the broker.
How to Avoid Margin Calls
Leverage is often and fittingly referred to as a double-edged sword. The
purpose of that statement is that the larger leverage you use to hold a
trade greater than some large multiple of your account, the less usable
margin you have to absorb any losses. The sword only cuts deeper if an
over-leveraged trade goes against you as the gains can quickly deplete
your account and when your usable margin % hits, zero, you will receive a
margin call. This only gives further credence to the reason of using
protective stops while cutting your losses as short as possible.
Forum on trading, automated trading systems and testing trading strategies
Something Interesting in Financial Video August 2013
newdigital, 2013.08.26 15:50
83. How Banks, Hedge Funds, and Corporations Move CurrenciesBehind central banks in terms of size and ability to move the foreign exchange market are the banks which we learned about in our previous lessons which make up the Interbank market. It is important to understand here that in addition to executing trades on behalf of their clients, the bank's traders often times try to earn additional profits by taking speculative positions in the market as well.
While most of the other players we are going to discuss in this lesson do not have the size and clout to move the market in their favor, many of these bank traders are an exception to this rule and can leverage their huge buying power and inside knowledge of client order flow to move the market in their favor. This is why you hear about quick market jumps in the foreign exchange market being attributed to the clearing out the stops in the market or protecting an option level, things which we will learn more about in later lessons.
The next level of participants is the large hedge funds who trade in the foreign exchange market for speculative purposes to try and generate alpha, or a return for their investors that is over and above the average market return. Most forex hedge funds are trend following, meaning they tend to build into longer term positions over time to try and profit from a longer term uptrend or downtrend in the market. These funds are one of the reasons that currencies often times develop nice longer term trends, something that can be of benefit to the individual position trader.
Although not the typical way that Hedge funds profit from the market, probably the most famous example of a hedge fund trading foreign exchange is the example of George Soros' Quantum fund who made a very large amount of money betting against the Bank of England.
In short, the Bank of England had tried to fix the exchange rate of the British Pound at a particular level buy buying British Pounds, even though market forces were trying to push the value of the Pound Down. Soros felt that this was a losing battle and essentially bet the entire value of his $1 Billion hedge fund that the value of the pound would decrease. The market forces which were already at play, combined with Soro's huge position against the Bank of England, caused so much selling pressure on the pound that the Bank of England had to give up trying to prop up the currency and it preceded to fall over 5% in one day. This is a gigantic move for a major currency, and a move which netted Soros' Quantum Fund over $1 Billion in profits in one day.
Next in line are multinational corporations who are forced to be participants in the forex market because of their overseas earnings which are often converted back into US Dollars or other currencies depending on where the company is headquartered. As the value of the currency in which the overseas revenue was earned can rise or fall before that conversion, the company is exposed to potential losses and/or gains in revenue which have nothing to do with their business. To remove this exchange rate uncertainty many multinational corporations will hedge this risk by taking positions in the forex market which negate any exchange rate fluctuation on their overseas revenues.
Secondly these corporations also buy other corporations overseas, something which is known as cross boarder mergers and acquisitions. As the transaction for the company being bought or sold is done in that company's home country and currency, this can drive the value of a currency up as demand is created for the currency to buy the company or down as supply is created when the company is sold.
Lastly are individuals such as you and I who participate in the forex market in three main areas.
1. As Investors Seeking Yield: Although not very popular in the United States, overseas and particularly in Japan where interest rates have been close to zero for many years, individuals will buy the currencies or other assets of a country with a higher interest rate in order to earn a higher rate of return on their money. This is also referred to as a carry trade, something that we will learn more about in later lessons.
2. As Travelers: Obviously when traveling to a country which has a different currency individual travelers must exchange their home currency for the currency of the country where they are traveling.
3. Individual speculators who actively trade currencies trying to profit from the fluctuation of one currency against another. This is as we discussed in our last lesson a relatively new phenomenon but most likely the reason why you are watching this video and therefore a growing one.
Forum on trading, automated trading systems and testing trading strategies
Something Interesting to Read February 2014
newdigital, 2014.02.13 09:18
The Sensible Guide to Forex: Safer, Smarter Ways to Survive and Prosper
from the Start is written for the risk averse, mainstream retail
investor or trader seeking a more effective way to tap forex markets to
improve returns and hedge currency risk. As the most widely held
currencies are being devalued, they're taking your portfolio down with
them—unless you're prepared.
For traders, the book focuses on reducing the high risk, complexity, and time demands normally associated with forex trading.
For long-term investors, it concentrates on how to hedge currency risk
by diversifying portfolios into the strongest currencies for lower risk
and higher capital gains and income.
The usual forex materials don't provide practical answers for most
retail traders or longer term investors. Virtually all forex trading
materials focus on time-consuming, high-leverage, high-risk methods at
which most traders fail. Materials about long-term investing in foreign
assets rarely take into account the prospects of the related currency. A
falling currency can turn an otherwise good investment into a bad one.
Throughout the book, the emphasis is on planning and executing only low
risk, high potential yield trades or investments and avoiding serious
losses at all costs. Packed with richly illustrated examples every step
of the way and including additional appendices and references to online
resources, the book is the ultimate guide to forex for retail traders
and investors seeking to tap forex markets for better currency
diversification and income.
Provides traders with safer, smarter, less complex and
time-consuming ways to trade forex with higher odds of success. These
include the use of such increasingly popular new instruments like forex
binary options and social trading accounts that mimic expert traders.
Shows investors how to identify the currencies most likely to hold
or increase their value, and provides a wealth of ideas about how to
apply that knowledge to a long-term, low-maintenance portfolio for both
income and capital appreciation.
Helps anyone seeking an asset class with low correlation to other
markets by explaining how the very nature of forex markets means that
regardless of market conditions there's always a playable trend
somewhere, regardless of what other asset markets are doing, and how to
find and exploit it for a short-term trade or a long-term investment in a
currency pair, stock, bond, or other asset
The Sensible Guide to Forex is only book that teaches mainstream risk
averse investors and traders how to build a portfolio that’s diversified
by currency exposure as well as by asset class and sector, via a
variety of safer, simpler methods to suit different needs, risk
tolerances, and levels of expertise.
Written by Cliff Wachtel, a 30+ year financial market writer, advisor,
and analyst, The Sensible Guide to Forex offers practical solutions to
the above dilemmas faced by every serious, prudent investor.
Forum on trading, automated trading systems and testing trading strategies
newdigital, 2014.02.13 06:31
Spreads Can Cause Margin Calls (based on dailyfx article)
At this point in our trading education, we should be aware of the fact
that FX spreads are variable and can widen to levels several times
larger than their typical spreads. These spread increases are most often
seen during news releases and can affect our positions rapidly. But,
what is the best way to weather the storm during times of widening
spreads?
How to Truly Protect Ourselves Against Widening Spreads
The only way to protect ourselves during times of widening spreads is to
restrict the amount of leverage used in our account (which in my
opinion, should be less than 10x leverage). Spreads can only hurt us
when a trade is being opened or closed. If we aren’t opening or closing a
trade during a news events, we won’t be affected. Prices will
eventually go back to normal and at some point we will close on our own
terms.
The only time the market can force our hand to liquidate our positions
is with a margin call. If we reduce our leverage, we reduce our chances
of liquidation.
The “Hedging” Myth
Helping traders around the world means that I have seen many different
methods to trade this market, both good and bad. One of the most
damaging methods I’ve come across is the idea of ‘hedging’ a Forex trade
by opening an opposing trade in the same currency pair and holding both
long and short positions simultaneously. This not only incurs greater
trade cost (by paying additional spread) but does not protect your
position against additional losses.
Hedgers attempt to lock-in their profit or loss on a trade by opening an
opposing trade, but if the spread widens, this negatively affects both
sides of the trade. If the trader is over leveraged on these trades, a
wider spread could incur a margin call and liquidate both positions.
Worst of all, you would most likely be filled at the widened spread
prices, adding insult to injury.
So now we know, hedging is not the proper way to secure a profit or a
loss. Only the closing of a position can do that. Hedging also can be
dangerous around widening spreads and can cause margin calls, so we need
to limit the amount of leverage we are using to 10x or less.
I agree with Ubzen.
Bigger is better.
But sometimes, EAs are working better with lower leverage (they loose less in fact ;)
It's interesting when backtesting just to change leverage to check the difference it makes with percentage risk.
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