New thoughts on use of Leverage

Discussion in 'Forex' started by milktruck, Dec 4, 2008.

  1. you know what, I recently can open my own account (was trading for a firm prior), and now that its my money I realized I want to deposit as little as possible with my broker.

    Ive really changed my mind about this leverage thing. Is there any reason I cant, for example, trade a $2k account like its $10k and keep $8k in my savings account, earning a (very) little interest and adding to my forex account in the case of a drawdown that would leave me less than margin + stop for the next trade?

    Im thinking the only concern would be margin calls, but I generally risk 1-2%, trade around 5:1 and pyramid a little here and there on winners, where I might have to be careful if I get a runner I really like and pile on.

    Am I missing anything here? Maybe a better ratio of account size to trading capital size?
  2. You are correct but if you hold overnight positions, the more leverage you use the higher your rollover costs.

    I have 50% with broker, this is also safer way to do it if broker goes belly up, but calculate your roll over costs as well bu then again i trade through mb and they screw you on the swap rates, thats their only downfall.
  3. ah no nothing overnight. I am very reassured that you do this as well, as I've seen you refute posters claims that more leverage is the same as more capital, and I was afraid I was moving to the dark side haha.
  4. Rollover is something that makes me really angry about forex.

  5. I was surprised that those traders did not understand what leverage exactly is. The issue is that you find guys going to read a book like the fall of LTCM and they hear popular hedge fund managers talking bad about leverage and then assume that leverage is bad. The truth is that leverage is only bad if you are exposed to tale risk, if liquidity dries up and you cannot exit your positions, now none of us here trade anywhere near that size.

    LTCM was the blue eyed boy of wallstreet because they use leverage to the max, sometimes they didnt even put anything down but they didnt count on liquidity drying up after Russia defaulted on her debt. Therefore if you have a $ 100billion position watch out for tail risk and have a hedge plan just in case.

    You will find big time macro traders, dont do spot unless its part of other transactions, what they do is use options to cut of tail risk. That is why there is alot of money to be made on the spot side since a lot of hedging going on.
  6. thedewar


    the whole point of leverage is to maximize gains.... you can trade larger positions, especially within forex where the small movements can then become large gains..

    put your money wherever you feel like... 2k in forex moving 10k or 10k in forex moving 50k... it really doesn't matter, you're going to make/lose more thats all leverage does.

    Why would you put money in a savings account??! atleast go money market or something where you could do 5-8% the 1.5% your bank gives you isn't even going to compensate for inflation
  7. You will loose how much you want too loose unless there is a liquidity crises. Leverage will not make you loose more than what you expect unless, again there is a liquidity crises. Retail fx traders really need to to study portfolio theory and risk modelling. If you dont know what the hell you doing leverage will magnify your losses, if you are one of those fools who sets a mental stop and then when price hits it you dont close but instead hope that price will go your way......yes leverage will kill, but be certain something will kill you if that is your skill level.
  8. Surdo


    You can always get a loose women when you lose your shirt to the market.
  9. my internet savings makes more than the money market options I've seen, tho they did recently reduce my rate from 5%. if you have money market funds making 8% somewhere, feel free to pass that name along.
  10. thedewar


    that was what i made about 3 years ago on one money market account i had.... i think templeton has a solid account but i haven't looked into it in a while
    #10     Dec 5, 2008