FOREX Leverage: when you can bet more money than you have

Discussion in 'Stock Market Education' started by WaveWage, Sep 4, 2015.

  1. WaveWage

    WaveWage Well-Known Member

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    One thing exists more in FOREX market than in any other market: leverage. Yes, leverage exists in a lot of markets. But I guess in FOREX is it even more used, given the fact FOREX is rarely high, you either have 0.XXX $ or 1.XXX currency. Okay, some currencies are less stronger so that happens to have a bigger number, but that's not what happens the most commonly.


    So, leverage. Leverage is about letting you betting more money than you have. Let's say you got 100$ and you have a 100:1 leverage from your broker. You can bet 10,000$ "virtual dollar". The 100$ will come from you, and the rest from your broker. Nice, but what's the downside?


    You buy at 0.5$ and it ends up at 0.4$. You bet all your 10,000$ on it, so finally, you brought 20,000 assets of it. Because of this new price, you see -2000$ on your account. What does it mean? Well, all your loses are real, so if you lose, you will really have to pay 2,000$, basically 20 times your initial budget you allocated at start. On the other side, if you win, your earning will follow the same rule.


    Now it is explained, I want to know your thoughts about risks and so on? As you seen, it can be pretty risky. Markets limits broker's leverage per country, but still.
     
  2. crimsonghost747

    crimsonghost747 Senior Investor

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    Well yeah the moves in FOREX are pretty small so leverage is necessary.
    I currently use no leverage as I'm only building a long term portfolio... stocks and bonds of course. However if the markets slide downwards... the further we go the more leverage I will use. I only keep an eye on forex because I live in europe but most of my investments are in USD or CAD.
     
  3. JR Ewing

    JR Ewing Super Moderator Staff Member

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    I don't really fool with FOREX trading, but I will occasionally trade USD for another currency than I will usually use to buy certain assets or commodities as investments.

    I never go any higher than 200% (my $ plus a dollar for dollar match from the BD), and I'm almost always well below that. Sometimes I'm not even 100% invested even with puts, calls, shorts, commodities, etc added to long stock positions. It just depends.
     
  4. WaveWage

    WaveWage Well-Known Member

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    Well, the FOREX leverage is needed, in your opinion? I think that even in short term (I talk about perhaps days, weeks?), you may win money without any kind of leverage, avoiding risks, even if the wins and the looses are less consequent than with it. However, the FOREX is inherently bounded within limits. For example, you won't see for a while a USD/EUR rate of 2 while in stock it happens, that's why I may understand leverage, but the risks taken of loosing more is...dangerous, I find.

    Why don't you "mess" with FOREX trading so much? However, I must think your strategy seems fine and careful while you may earn few extra by doing it. But I don't think you win a looot, just really extra, but extra are cool ;)
     
  5. crimsonghost747

    crimsonghost747 Senior Investor

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    For most people, yes it's needed. The changes are so minimal (for example the current daily change for EUR.USD is 0.11%) that in order to get any kind of meaningfull profits you either need to have a HUGE pile of cash or use leveraged instruments.
     
  6. JR Ewing

    JR Ewing Super Moderator Staff Member

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    FOREX trading is very risky. Statistically, you have about a 5% chance of succeeding. And those who are more likely to succeed are going to be those with huge amounts of money to trade with and to invest in setting up or buying on of those rare proven automated HFT systems that find the right buying and selling opportunities quickly and execute those trades very fast.
     
  7. WaveWage

    WaveWage Well-Known Member

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    Do you means that it's pretty unlikely to win over FOREX humanly? Well, it seems it is unlikely to win over FOREX as a whole, if it's 5%.
    Then, why there's so much brokers, companies and talk about something with only 5% of chance? Sure, I'm sure that for someone who was playing on lotteries, 5% feels suddenly a lot, but it is also so much more complicated. So you would basically not recommend it for investors as a whole, and you would head them elsewhere, basically?


    I think that if you take the security of having some money to sponge any loss you may encounter, while you can't cover a whole leverage, it should add up some security, no?
     
  8. JR Ewing

    JR Ewing Super Moderator Staff Member

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    Those who push day trading, forex trading, etc generally have a vested interest in doing so. And it feeds into greed and the desire for the quick buck that those who buy into such trading want to hear and tell themselves. And those who sell trading books and programs and who run brokerages who make money off of every trade you execute will make money off you whether you succeed or not.

    It's not that hard to convince novices and even many unsophisticated investors who have accumulated some degree of wealth already that the ~ 10% total return the S&P has averaged over the last 50 or so years is "lame" or whatever, and that this or that new trading system will produce 50% or 100% or more annual returns. Such returns are often fabricated, or at best were obtained over a very short timeframe like a year or 2 at best.

    Even if you have a very good system that makes money regularly in pretty much any market and doesn't lose much, you're going to have to deal with transaction costs and short term capital gains taxes. A better system is lucky to be right much more than 50% of the time. Then you have to worry about keeping your losses to small dollar amounts, not allowing too many of your gains to turn into losses... and having gains be big enough overall to offset those losses, transaction costs, and short term cap gains taxes on the gains.

    And of course you'll have to have money set aside to live on, and either be able to quit working or have a job that allows for trading time one way or another.
     
  9. JR Ewing

    JR Ewing Super Moderator Staff Member

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    Another thing about using any sort of "day trading" method exclusively that dictates that you go to 100% cash in your portfolio at the end of the trading day is that you will miss out on the "gaps" that occur with markets and individual securities. The big moves usually happen outside of market hours, so that markets and securities often open up or down from the previous day - sometimes by a substantial amount.

    It's not at all uncommon for a stock to open up 5-10% or more up or down from the previous day on things such as earnings news, new or improved products or services, M&A or activist activity, drug approvals, etc, etc.

    If you utilize a brokerage software system that allows you to trade outside of regular market hours, you're going to be paying more for it, and you're also going to find out that trading before or after market hours is riskier and less orderly - you're much more likely to get a bad price on a buy or sell, for instance. You may also find it more difficult to find a buyer or seller in some cases.

    The vast majority of the money I've made over the years has been made when I wake up in the morning and find out that my long positions have opened up higher than they were the day before, and that any short positions have opened up lower than they were the day before.
     
  10. crimsonghost747

    crimsonghost747 Senior Investor

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    Well JR had a longer answer but in reality it comes down to this: why do companies and service providers market their products to you?
    Because they need customers... because a customer means profit. They don't care if you win or lose when trading, they still get the commission (and sometimes other fees) which is how they make their money. And day trading means more trades, more commission, and more profit for them.
     

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