Need some help on Forex position confusion

[klrman]

This may seem like a bunch of stupid questions, but I'm new to Forex Trading and trading in general and I'm trying to cement in mind if I am allowing enough funds to cover a position that I was thinking about. (I think position is the word I'm looking for?)

Here is what I have been thinking about;


-want to trade AUS/USD

- if I purchase $1,OOO,OOO usd at 200:1 leverage at .5% would 20k be enough money to hold my position if the USD dollar rises against me by 3 cents?

- how long can I hold my position if I did not want to put a stop/loss in there. Is this an indefinite thing, or at some point am I forced to sell off or lose it all?

- if I hold this position for lets say 6 months, do the brokers charge me any negative interest because the USD has lower interest rates than the AUS?

- are there any other charges that creep up on a daily basis whilst I'm hanging on hoping for things to move in my favour?


I think that is all that has been bugging me for quite some time now. Thanks for any help on this.

 

[Tanaka]

I recommend you do the free online course @ http://www.babypips.com/

Forex didn't fully make sense to me until I did it, and it's FREE!

 

[Helliune]

Hmm, ok. I'm quite new to forex myself, but I am finding that I love carry trading, so I might be able to answer these questions.

Remember firstly though, each broker can have their own individual fees and charges and can be different to one another. There might also be individual difference in brokers as to how they handle overnight trades (trades kept open over night or longer). You need to read the fine legal print they give you upon your request to know what those charges are. Please keep all that in mind while reading the rest of my post.

The rest of this post assumes that you have a broker where the broker has no hidden charges and doesn't have charges that are unusal from the 'norm':

So you want to trade AUDUSD. Because Australia has a larger interest rate to the US, if you buy (go long) AUDUSD you will receive swap / rollover each day that you hold onto the trade. If you sell (go short) AUDUSD then you will pay swap / rollover each day that you hold onto the trade.

If my maths is right, a 1,000,000 size trade at 200:1 will require 1,000,000 / 200 = 5,000... $5,000 in your account. For 10 standard lots (which equals 1,000,000 units) 1 pip movement = $100. A price movement of 3c against you (which is I belive 300 pips) will result in a loss of $30,000 USD. So $20,000 wont be enough. If you did this with $20,000 in the bank, you'd get a margin call and probably loose the whole $20,000. Different brokers have different rules as to how they deal with this situation and when they deal with it. You'll need to read the fine print to find out.

If you dont suffer a margin call, then you should be able to hold it 'indefinitely'.

Based on the 'norm' for brokers, swap / rollover should be the only thing that should affect your trade on a daily basis while it is open.

Like the post above me, I also strongly suggest babypips.com as a place to learn more about how to make forex work for you.

If you are seriously considering creating a big trade and holding it using most of your capital without any stop loss, then I strongly suggest you learn a lot more before doing it.

I'd recommend that you start with a demo account with the same amount you intend on starting with ($5,000 or $20,000 or whatever) and then run your idea using the demo account and see how it goes. It might scare you into learning more before preceeding.

Remember - it's easier to loose money than it is to make it. As a result, money management is, in itself, actually a profitable thing to do.

If my maths or anything I have said is wrong in any way, could someone prompty correct me. I really dont want to mislead the OP.

 

[klrman]

Helluine, I really appreciate you taking the time to answer this for me. I am on babypips, but these things were running through my mind and I just needed to throw it out there.

If I can hold on to a trade as long as I want without having a margin call against me, then that is what I would really like. So far, I have talked to one broker and he told me I can not be out more than what is in my account, but when I read the fine print, it states I can lose all the money in my account and much more, so finding an honest broker and outfit who doesn't lie and an outfit that doesn't trade against my trade has been the biggest challenge after reading all the pro's and con's of each of them.

Do you think you could explain your sentence below in a way I could understand it better? I think what you are saying is that if I buy AUDUSD I will be paying interest on what I buy when I sell? So if I understand correctly, USD is paying around .5% and AUS is paying around 4%, so if I hold on with leverage 1mil USD, does that mean after lets say, 6 months, I will be have 2% of lmil USD charged against me, or $20,000 USD?

"Because Australia has a larger interest rate to the US, if you buy (go long) AUDUSD you will receive swap / rollover each day that you hold onto the trade. If you sell (go short) AUDUSD then you will pay swap / rollover each day that you hold onto the trade."

 

[Helliune]

Do you think you could explain your sentence below in a way I could understand it better? I think what you are saying is that if I buy AUDUSD I will be paying interest on what I buy when I sell? So if I understand correctly, USD is paying around .5% and AUS is paying around 4%, so if I hold on with leverage 1mil USD, does that mean after lets say, 6 months, I will be have 2% of lmil USD charged against me, or $20,000 USD?

"Because Australia has a larger interest rate to the US, if you buy (go long) AUDUSD you will receive swap / rollover each day that you hold onto the trade. If you sell (go short) AUDUSD then you will pay swap / rollover each day that you hold onto the trade."

Based on the current interest rate difference between AUD and USD: If you buy AUDUSD (as opposed to short selling it) you will generate daily income from the daily swap rate from the trade (depending on how the broker handles the swap - something you should look into if you intend on holding trades long term). If you short sell the AUDUSD, you will pay the daily swap rate.

As to how much exactly you will make or loose on the swap... that gets a little murky unfortunately. I'm still trying to find the forumulas regarding it. Basically it is supposed to be the difference in interest rates which if it is positive, it is given to you and if it is negative you pay the difference.... BUT, apparently brokers take a slice of the pie and the swap rates are not the straight out interest difference. On top of that swap rates come in different forms, from pip difference to interest different to $ difference, making it harder to figure out.

So I'm still trying to figure out what the swap rates actually are. I'm with GO Markets and they have the rollover / swap rates displayed on their website: http://www.gomarketsaus.com/swaprates.html but I cant decipher it. The numbers that come out of MT4 (the platform they use) are different from that website and I just cant make sense of the calculations. If I ever do, I'll post my results. (maybe someone else here can help. But I've gone through 20+ threads on the MT4 forums and no one seems to know how they are properly calculated.)

Also, each platform has different ways of showing the swap (or whether it shows it at all), making it harder to figure out. FX Trading Station II seems to calculate and display it in a way that makes it the easiest to figure out. MT4 shows the accumulated total (profit or loss) of the swap while the trade is open (but this profit is unaccessable until you close the trade). GFT's Deal Book is on a whole other world where it will actually CLOSE your trade each day (whether you like it or not) and then reopen the trade at the current price. Note that all Forex brokers do this, but they hide it to look like your trade was opened the day you opened it (which is a nice way of doing it). GFT though is old school... if you loose say 100 pips in one day, you'll pocket that loss without a choice. If you make 50 pips the next day, you'll pocket that gain, etc. It's a bit of a roller coaster ride I find with those guys. But that might be what you're after, I dont know. (As far as I can gather, the stop loss stays in the same place, so it's ultimately the same as other brokers, just more hair-raising).

edit:

If I can hold on to a trade as long as I want without having a margin call against me, then that is what I would really like. So far, I have talked to one broker and he told me I can not be out more than what is in my account, but when I read the fine print, it states I can lose all the money in my account and much more, so finding an honest broker and outfit who doesn't lie and an outfit that doesn't trade against my trade has been the biggest challenge after reading all the pro's and con's of each of them.

It would be really, really nice just to whack a heap in an acount and then whack all of it into a trade and then sit back and reap the rewards... but you need to look at the down side. Can you handle the down side or doing it that way? If the answer is no, then you need to manage the risk so that if you get hit with the down side, you dont destroy yourself.

What I do is slowly enter positions with part of my account. I have no intention of closing my trades, only having it generate income for myself. In an ideal world I'd love for these trades to never close. BUT, I cannot afford to loose all my money... besides, sitting on a trade that is constantly going against you is (imo) suicide. So, I put stop losses on every trade at -50 pips. When the trade is +50 pips in the profit, I then move the stop loss to break even and then initiate another trade. 50 pips is around 1% of my account. So if things go against me, I will loose 1% of my account at most.

Now, I might set up a few of these trades over a few currency pairs (say 6 pairs). That means if all those trades with -50 pip stop losses go bad on me, then I'll loose 6 x 1% of my account = 6% of my account.

Something I learned in baby pips is how important money management is: If you loose 10% of your account it will take a 11% return from the remainder of your money to make it back. It gets more and more worse the lower your account gets... to the point that if you loose 90% of your account, then you need to make a 900% return on the remainder of your account (10%). So what I learned from there is never let your account go below 10% - and if it does, move into damage control (go even more conservative on your trades).

But that's just my way of doing it. Always assess the downside. If you can handle it or can accept it, then move on from there. If you are simply looking at the possible profit then you could be in danger.

Just my 2c worth from what I've learned so far.

 

[klrman]

Something I learned in baby pips is how important money management is: If you loose 10% of your account it will take a 11% return from the remainder of your money to make it back. It gets more and more worse the lower your account gets... to the point that if you loose 90% of your account, then you need to make a 900% return on the remainder of your account (10%). So what I learned from there is never let your account go below 10% - and if it does, move into damage control (go even more conservative on your trades).

But that's just my way of doing it. Always assess the downside. If you can handle it or can accept it, then move on from there. If you are simply looking at the possible profit then you could be in danger.

Just my 2c worth from what I've learned so far.

I guess I need to learn more after reading your above quote! I didn't know if my account goes down like that it could take 900% return to get it back. Maybe I am misinterpreting what you are saying though, so here are some numbers and maybe you could clear it up for me hopefully

If I purchased 1mil USD with AUS at 100:1 and I deposit 35k in my account to cover a downslide, then when the dollar evens itself out to where I purchased it and then moves up a few cents, shouldn't that balance it all out again and give me a really good profit of around $30,000?

What I am thinking of is just buying 1mil USD and holding on to it for a few months if need be and if it goes 3 cents up against me, then I don't care because I am willing to gamble that not so long it will drop to the point where I purchased it and eventually move down 3 cents in my favour?

 

[tech/a]

What I am thinking of is just buying 1mil USD and holding on to it for a few months if need be and if it goes 3 cents up against me, then I don't care because I am willing to gamble that not so long it will drop to the point where I purchased it and eventually move down 3 cents in my favour?

Very silly beginner person.

 

[Helliune]

I guess I need to learn more after reading your above quote! I didn't know if my account goes down like that it could take 900% return to get it back. Maybe I am misinterpreting what you are saying though, so here are some numbers and maybe you could clear it up for me hopefully

If I purchased 1mil USD with AUS at 100:1 and I deposit 35k in my account to cover a downslide, then when the dollar evens itself out to where I purchased it and then moves up a few cents, shouldn't that balance it all out again and give me a really good profit of around $30,000?

What I am thinking of is just buying 1mil USD and holding on to it for a few months if need be and if it goes 3 cents up against me, then I don't care because I am willing to gamble that not so long it will drop to the point where I purchased it and eventually move down 3 cents in my favour?

If it works out in your favour, it will do nothing but convince you that it was a good idea and so you will do it again... eventually you'll loose and loose big.

If it doesn't work out for you this time, you'll loose your entire capital. Can you handle loosing it all?

Look, when I first started, I started with GFT. It was the first time I've ever done online trading. I started with $300 and was trading in micro lots (1,000 size lots).

My strategy (then) was to simply buy if it got 'cheaper' (ie, the price dropped) and then sell as the price rose above break even. Occassionally I wasn't around and when I came back it was way above break even so I would close the trade, locking in a decent profit. As a newbie, I had this idea that it will always bounce back.

Then I put a trade into a pair that was trending down (without me knowing it).... having kept buying my way down, I was totally loaded up in the trade with all my money. So I had to wait for it bounce back (as I thought at that time that it always does).

Well, it didn't and overnight (being with GFT, they close and reopen your trade overnight without your input), I ended up loosing about 1/2 of my account.

Now, that was a $140 lesson I learned (and I'm glad I learned it). You seem to be wanting to learn a $35,000 lesson. Please try your strategy on a demo account first.

There is a reason why 90 - 95% of people who trade in Forex end up loosing money.

Regarding that 900% return to get it back again, read this section in babypips on money management: http://www.babypips.com/school/money_management.html It's pretty interesting with regards to staying in the game while get a string of losses.

 

[Whiskers]

I'd recommend that you start with a demo account with the same amount you intend on starting with ($5,000 or $20,000 or whatever) and then run your idea using the demo account and see how it goes. It might scare you into learning more before preceeding.

Remember - it's easier to loose money than it is to make it. As a result, money management is, in itself, actually a profitable thing to do.

I absolutely agree... you will learn a lot from the demo experience, more than can be explained in words.

Then go back to the study again to figure out all the factors and implications clearly in your own mind before you go live.

 

[klrman]

If it works out in your favour, it will do nothing but convince you that it was a good idea and so you will do it again... eventually you'll loose and loose big.

If it doesn't work out for you this time, you'll loose your entire capital. Can you handle loosing it all?

Look, when I first started, I started with GFT. It was the first time I've ever done online trading. I started with $300 and was trading in micro lots (1,000 size lots).

My strategy (then) was to simply buy if it got 'cheaper' (ie, the price dropped) and then sell as the price rose above break even. Occassionally I wasn't around and when I came back it was way above break even so I would close the trade, locking in a decent profit. As a newbie, I had this idea that it will always bounce back.

Then I put a trade into a pair that was trending down (without me knowing it).... having kept buying my way down, I was totally loaded up in the trade with all my money. So I had to wait for it bounce back (as I thought at that time that it always does).

Well, it didn't and overnight (being with GFT, they close and reopen your trade overnight without your input), I ended up loosing about 1/2 of my account.

Now, that was a $140 lesson I learned (and I'm glad I learned it). You seem to be wanting to learn a $35,000 lesson. Please try your strategy on a demo account first.

There is a reason why 90 - 95% of people who trade in Forex end up loosing money.

Regarding that 900% return to get it back again, read this section in babypips on money management: http://www.babypips.com/school/money_management.html It's pretty interesting with regards to staying in the game while get a string of losses.

Good advice there Helliune thanks! I still don't understand it all but I am trying to absorb it all and babypips and investopedia.

I am getting slowly used to a web demo platform from a ECN that I feel good about, but a so much to learn still. I do have another question that maybe you or others could possibly answer. I am interested in CAD/USD as well and the platform of the ECN only uses USD/CAD so it's displaying the conversions opposite to what I am used to. Talked to them and they said that's all they have and was wondering if it is any big deal when it comes to trading?

 

[builder2818]

If you are just starting out, apart from the fact that it would be silly to trade live money right from the beginning, the 200:1 leverage is just crazy for someone in your position.

Secondly, why would you want to trade without a stop loss? If the trade goes against you, your broker will only let your position go as far as your account balance will allow and then automatically stop you out - leaving you with nothing. Plus if you a shorting the AUD/USD because you think it may be at a high right now, you'll be paying rollover everyday you hold that position and which will reduce your account balance further - especially on 10 lots at 200:1.

As someone said earlier....risk management is so much more important in this business. You shouldn't feel like you have to put a position on or chase the market. The market has been around long before you and will still be there long after you're gone and there will always be trades to take.

 

[klrman]

If you are just starting out, apart from the fact that it would be silly to trade live money right from the beginning, the 200:1 leverage is just crazy for someone in your position.

Secondly, why would you want to trade without a stop loss? If the trade goes against you, your broker will only let your position go as far as your account balance will allow and then automatically stop you out - leaving you with nothing. Plus if you a shorting the AUD/USD because you think it may be at a high right now, you'll be paying rollover everyday you hold that position and which will reduce your account balance further - especially on 10 lots at 200:1.

As someone said earlier....risk management is so much more important in this business. You shouldn't feel like you have to put a position on or chase the market. The market has been around long before you and will still be there long after you're gone and there will always be trades to take.

If I can understand the risks involved with leverage then I would trade live, but I still don't get it fully yet. Thanks for the helpful warning as I know I have a lot to learn and probably will for a long time. I was just throwing it out there. Sometimes I go to the bank and I buy or sell a currency and have never lost yet, but since the banks now are far greedier than they use to be, it has forced me to learn about FX trading through a ECN.

I was ok in the past when they took 2/10ths of a cent each way as I was pretty sure what will happen and I will make a buck and always did, but now they are taking up to a cent each way when they feel like it and it is just not worth the risk anymore.

As soon as I can understand fully how much money I need in my account to cover a fall against me of a couple of cents plus rollover fees and whatever other fees sneak up on me, then I am comfortable waiting it out I think.

The one thing I don't like with some brokers is that they post on their website that you can't lose more than your equity, then on their disclaimer in smaller print they say you can lose much more than your equity and may be liable for it, so until I can clear this all up in my mind, I won't trade a cent.

 

[SmellyTerror]

As soon as I can understand fully how much money I need in my account to cover a fall against me of a couple of cents plus rollover fees and whatever other fees sneak up on me, then I am comfortable waiting it out I think.

Put it this way: if you trade long enough, everything that can happen, will happen. And you want to be in this for the long haul.

Some day, the price you enter the market will just get left behind. Some day there will be a long, LONG run in the wrong direction. No matter how much room you leave yourself, some day it will not be enough. 3 cents, 10 cents, more, doesn't matter - new ranges are formed, big events happen, fundamental re-ratings happen. Buildings go down in flame, wars start, banks collapse, governments topple. Taxes are introduced, stimulus packages are bungled, good policy is implemented. Hell, some bloke in a suit says something that he thinks is the bleeding obvious but which everyone else decides is the End Of The World. You'll go past your margin's ability to stretch, or the price you entered at is literally never seen again.

Maybe there's only a 1% chance. Maybe it will take years and many, many trades to happen. But some day it will happen. And when it does, with the plan you seem to have, you will lose your entire account.

You are confusing two completely different things: being profitable and being right.

Your system may have the virtue of being right most of the time. But it also has around a 100% chance of losing your entire account in the long run.

This game we play is a good game. If you can stay in it long enough, you'll make money. There are lots of tricks to making more of it, but the #1 trick is staying in the game. This plan would not do that.

 

[klrman]

Put it this way: if you trade long enough, everything that can happen, will happen. And you want to be in this for the long haul.

Some day, the price you enter the market will just get left behind. Some day there will be a long, LONG run in the wrong direction. No matter how much room you leave yourself, some day it will not be enough. 3 cents, 10 cents, more, doesn't matter - new ranges are formed, big events happen, fundamental re-ratings happen. Buildings go down in flame, wars start, banks collapse, governments topple. Taxes are introduced, stimulus packages are bungled, good policy is implemented. Hell, some bloke in a suit says something that he thinks is the bleeding obvious but which everyone else decides is the End Of The World. You'll go past your margin's ability to stretch, or the price you entered at is literally never seen again.

Maybe there's only a 1% chance. Maybe it will take years and many, many trades to happen. But some day it will happen. And when it does, with the plan you seem to have, you will lose your entire account.

You are confusing two completely different things: being profitable and being right.

Your system may have the virtue of being right most of the time. But it also has around a 100% chance of losing your entire account in the long run.

This game we play is a good game. If you can stay in it long enough, you'll make money. There are lots of tricks to making more of it, but the #1 trick is staying in the game. This plan would not do that.

I see what you are saying and thanks for helping me out here! I did not think my strategy would work out in the long run, but a good way to make a buck for a little while. I have all these ideas and formulas in my head that I am trying to express in equations in excel and make it work some numbers for me, so hopefully as time goes on I have a decent strategy that works for the long run. Thanks again for setting me straight on a few things!