Forex Trading on Position Sizing and Leverage

For the past when I hear about Forex, I will feel curious but at the same time feeling aversion about it. That is because when I hear people talk about it and see a lot of articles regarding Forex…all down to one same thing — People lose money on Forex. Slowly it crave a negative perspective on Forex in my head.

Until one day, a salesgirl from Oanda, a Forex broker firm called me. She called me as I was opening a demo account with them and she thought that I may be interested to open a real account with them as currently there is free 100USD cash promotion going on for opening a new account.

100USD? I was wondering if this is a scam. Due to my curiosity in the end I did open a trading account with them and I really got the 100USD. I am also able to withdraw that 100USD which is close to 140SGD. That is how i got free capital  to do forex trading and know about Forex.

So what is Forex? For the past I tried to understand from online resources but i found that the info from online were too overwhelming. So let’s me cut it simple in this article.

Forex = Foreign Exchange Market

There are two key things in Forex. Pips and Spread.

Pips = The pip is the smallest amount a price can move in any currency quote

Spread = The difference between the bid price and the ask price is called a spread

Example: USD/SGD = 1.35960/1.35975

Buy/Bid/Long = 1.35960, Sell/Ask/Short = 1.35965 (As Sell must greater than buy)

1 Pip = 0.0001USD

The spread is 1.5 pips.

 

In Forex, there is always a pair of currency, Like USD/JPY, USD/SGD, EUR/GBP, EUR/USD and so on…

So for example to buy 1 unit of USD/SGD in real life require 1.36SGD for an exchange of 1USD. But in Forex trading, they talk a lot about leverage.

As you can imagine USD/SGD for every 1 movement of pip is 0.0001USD…it need take 10,000 pips for us to see a 1 dollar difference. It just mean to get the 1USD, the current trading of USD/SGD need increase from 1.36 to 2.36..which is unlikely to happen in near term or next 5 yrs.

That’s why most broker firm give the leverage feature, some up to 250…for Oanda is up to 50. This mean that for every 100 dollars in your account, you can trade up to 5,000 dollars. Which mean that by right with 100 dollars you barely can buy 100 units of USD/SGD@1.36, now you can buy close to 4,000 units.

If 1 unit, 1 pip movement is 0.0001$,

1000 unit, 1 pip movement will be 0.1$.

So what is the appropriate leverage and position should we take?

With the understanding above, if we trade 1 unit, to be honest..how is it possible our account can burst or we can incur large losses? It take a dollar movement to make us only lose a dollar which is like not possible in 5 years…mostly every 0.1 change in the pair currency will make us lose few cents…and if we see from chart..it sometime take years to happen.

So why most people trade Forex loss money or burst their account?

The key word is Over-Leverage.

If we use leverage in a right way it will bring good than harm…let say you just need 50% of the capital to do the investment. Let say you deposit 500SGD and you buy 1,000 units. it takes 2,500 pips to make you lose half of your capital (2,500 x 0.0001 = 250SGD). Which is unlikely can happen (if you buy at 1.36, it need plunge to 1.11 to achieve 2,500 pips, which for the past 10 years it had never happen before, lowest is 1.20)

But if you over-leverage that will be another story. For example, if you want to invest 1000 USD with your SGD. You just need to deposit as low as 30 SGD for you to able to achieve the same investment.

But the problem is the volatility in Forex market, if you invest real 1,360SGD for 1000USD…and now USD is only worth 1,335SGD. Basically you still have your 1,000USD and you wait the USD grow stronger and you still can profit from it. But then for your forex account, when your fund is lower than 20%, there will be margin call and your position will auto close-out and partial of your capital will be wipe out permanently. This mean that you will permanently lose like 25 SGD.

So the key thing to trade or invest in Forex, position sizing is important.

My guideline is 5 times leverage is the maximum that we should take. Means that if we have 1000 dollars in account. maximum we can trade is 5,000 dollars and shouldn’t more than that. For starter we should try to trade without leverage. This mean that if we have 100 dollars only in the trade account, we should trade according to that amount of trade units. After we familiar with how it works and achieve consistent profit then we slowly increase the leverage.

A good guide is try to risk max of 1% of your capital. According to DailyFx (Click here to read more), the average retail FX trader captures profits on their trades more than 50% of the time. This means that most traders should able reap profits right but that’s not the case. Why?

They lose more money on their losing trades than they make on their winning trades.

So with appropriate position sizing, good risk to reward ratio and with a good trading plan with the compounding come into play, slowly your account will grow profitable.

If you got any questions, feel free to comment below. Until next time, Cheers!

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Do not base any investment and or trading decision solely on the information. We accept no liability if you use the information to form trading or investing decisions or to trade real money. You should seek your own investment advice before making any decision based on the information from a licensed financial professional who will consider your personal objectives and circumstances.

It is possible to lose more than your initial investment or account deposit. Investing/Trading any financial market is risky, be aware of the risks and avoid trading with money you can’t afford to lose.

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