It certainly reduces risk to have multiple positions, but don't you still risk a giant loss on one trade if you don't use any stops? With the high leverage of forex, it seems that using no stops at all would wipe you out eventually. Enlighten me as to why that reasoning is wrong; I'd honestly love to hear it. Stop running is mostly why I'm not interested in forex as much. Thanks.
I don't use high leverage. I limit myself to 10:1. If I'm real confident about a position I might go as high as 30:1, but that's max. Once I spread the money around, I'm playing any given position at maybe $5 a pip, so 100 pips offside is $500, big deal. Besides, it's likely to be balanced by gains elsewhere. I do dump losing positions sometimes, but I prefer to do it manually than turn control over to a mechanism. I find, playing it this way, setting reasonable targets of 20-30 pips, and waiting patiently, my positions pay off around 99% of the time. If I dump one it's to free up capital because I've spotted a better chance elsewhere. Remeber that 20-30 pips at 10:1 is 2-3%, which if all my positions hit target once a week on average gives an annual gain of over 300%. If that ain't enough 4u, then - well, as the saying goes, pigs get slaughtered.
oh, ok. That makes more sense. 10:1 is not very leveraged compared to the average individual forex trader.
Actually, I lie. I do use stops to lock in profits as a position evolves. Not trailing stops - I prefer to use stop limits and manually adjust them from time to time. Basically, I'm a channel trader within a fundamental framework - i.e., I use fundamentals to predict the overall trend and I manually draw the support & resistance lines. Then I try to enter somewhere near support or resistance, always going with the fundmaental trend, and exit sometime after it's overshot the least-squares trend line. I use stops to catch breakouts, but I don't start deploying them until the position is solidly in the black. Anyway, I don't always play the same way. Right now, I believe USDJPY is in a major unwind, comparable to February, so I'm riding that one position at 30:1. I believe it will drop below 122, and maybe as low as 117. I shorted at 123.82 - so far so good. But just in case, I'm keeping a "manual trailing stop" in place around 30 pips up, which I figure is too far away to get hunted.
I agree . Its a no win situation if you try to trade news. I dont have a problem with the fx cash dealers. I realise and accept they are ass holes . But if you buy when the market moves smoothly you have no problem.
Is there a risk of being wiped out by one giant move against you that happens before a stop order can get filled, due to illiquidity or slippage? Does Forex gap like stocks? As leverage goes up, the risk of being wiped out by a suprise move also go up, so what is a safe level of margin for trading forex? Brokers advertise up to 500:1.
Forex gaps very seldom occur, but they do happen around big news events. Is there a risk of being wiped out on such events? Sure, if you're very much overleveraged and the trade goes sharply against you. But typically you can know when these events will happen ahead of time (e.g. today's FOMC announcement at 2:15 pm EST) and adjust positions accordingly. As for leverage, I would claim that most newer traders use too much of it. The leverage ratio doesn't matter as much as how much of a position you control in relation to your account size.
"How much of a position you control in relation to your account size" is how I would define leverage. Or rather, it is the ratio between the sum of all the positions you control and your account size. Keep your leverage down to 10:1 and you can make a nice profit without exorbitant risk. Just because your Forex house offers to let you play at 100:1 or even 500:1 doesn't mean you have to take them up on it, just like you don't have to drive your Ferrari at 200mph in traffic. Another little point that big-leverage players often don't appreciate: your leverage also magnifies your spread and/or commission, significantly worsening your odds. At 500:1 with a 3-pip spread you start off 15% down, and a17-pip move against you wipes you out. Your odds are better at roulette. At 10:1 you have 800 pips of cushion and the 3-pip spread is worth 0.3%. Playing EURUSD at IB where the spread plus two commissions is typically 0.9 pips, that's 0.09%. And if you make 10 pips, that's 1%, not a bad gain for a day or even a week. Actually you can make pretty good money at 5:1, where your cushion is 2000 pips, your EURUSD house rake is 0.045%, a 100-pip move against you costs you 5%, and who needs stops. As to sudden moves caused by announcements etc.: I generally try to be out of the market at points that are prone to sudden moves. A tactic I've tried with some success: get out just before the announcement, set a stop buy 5 pips above and a stop sell 5 pips below, attaching a trailing stop to each one, and sit back and watch the fireworks. If it zooms, whichever way it goes, you pick up a quick profit. If it yawns, so do you. If your stops don't get picked up, you shrug and try again next time.