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The ugly truth about leverage, margin and our markets
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The ugly truth about leverage, margin and our markets

  #1 (permalink)
Elite Member
Battle Ground, WA
 
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The ugly truth about leverage, margin and our markets

So, like many others, I've been on the hunt for a "good" broker.

I have been looking for a broker in the Forex or Futures market that is willing to help me accomplish sane money management.

All talk a big game about how you can always set your orders, or call the phone number if you need to close out. Lots of lip service, but no real intent to help you protect your equity in a real way when the market has been unkind to you.

The reality in the US is that for forex day traders, you will be forced to use 50:1 leverage whether you want to or not and for futures day traders, you are forced to use up to 500:1!!! Please, do not argue that leverage is based on position size. It absolutely is not!!!

None of the brokers I have spoken to(all of the majors as far as I can tell) will margin call you at any margin level below 100%. They all say you can just take smaller positions sizes and set stops, but this does not really protect equity in any way in "adverse market conditions".

Here is an example that I worked through this morning with ATC Brokers. At ATC Brokers, the minimum account for forex is $5K. Say I open a 5K account and only want to risk 1% of my capital, so let's say I take a position of 10 mini lots of GBP/USD. This will require@ 1800 of margin. on a $5000 account, there is $3200 left to be eaten before margin call. Say I sell at 1.5555 and have a stop limit at 1.5560. If the market gaps up to 1.55601 and keeps going, my position is open until somebody closes it. Whether by margin call, platform execution or me calling the trade desk. Not a problem if price stalls out just over my limit or retraces, but what if it keeps climbing 5-10 pips every minute for a couple hours and I am not able to manage it myself(rare instance for sure, but totally possible)?

Why do none of the brokers have any mechanism for closing out when account margin has exceeded any threshold less than 100%

WTF? How can this be right? There is no rational, cogent argument I can come up with to support this policy except unfettered greed and avarice. Can someone on the "other side" perhaps enlighten me why I'm lost on this?

If there are regulations forcing us to use 50:1 and 500:1 leverage, why can't there be one that mandates that brokers have some way of trying to help their clients(the ones that want it at least) when shit gets crazy.

Really disgusted and dismayed... That being said, I am an experienced and profitable trader and this knowledge will not leave me crying on my mommy's shoulder, but wow, what a bummer.

P.S. Another thing I found out is that if you are looking into doing cme currency futures(mini contracts, not full size) instead of spot forex, forget it, the liquidity is absolutely dismal(for day traders).

 
  #2 (permalink)
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  #3 (permalink)
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The first way to protect yourself is to trade a very liquid market where gaps are less likely or at least muted. Only trade when market is most liquid not holding positions over night. Personally if I do anything overnight I use zero leverage. Never have a position on that you are not monitoring. Be smart about using leverage.

Know how an exchange handles a gap past your stop. If the stuff I trade gaps over my stop it will immediately turn into a market order and fill. In a liquid market seldom happens and if does not much slippage.

I don't think it should be brokers responsibility when there are plenty of ways to protect your capital.

Have a sound plan that keeps you away from a broker ever having to liquidate your account. If you are wanting broker to protect and liquidate you to keep from getting a call your plan is a bad one. Setup a plan and trade in a way that never allows you to get close to that scenario.

Just thinking out loud in the above not preaching at you. I personally hate forex feels like the wild west. It seems almost rigged to me. Better places to trade imo.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."

Last edited by liquidcci; December 12th, 2011 at 05:28 PM.
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  #4 (permalink)
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If you have a full services broker and give him/her instruction, and he failed to follow instruction, then yes, it is their fault.

But if you are using discount broker, then you are on your own.

Btw, first rule of trading is taking responsibility. Don't blame other for your misfortune.

 
  #5 (permalink)
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DarkPool View Post
The reality in the US is that for forex day traders, you will be forced to use 50:1 leverage whether you want to or not and for futures day traders, you are forced to use up to 500:1!!! Please, do not argue that leverage is based on position size. It absolutely is not!!!

I love to argue, and I actually do think that leverage is based on position size.


DarkPool View Post
None of the brokers I have spoken to(all of the majors as far as I can tell) will margin call you at any margin level below 100%. They all say you can just take smaller positions sizes and set stops, but this does not really protect equity in any way in "adverse market conditions".

Here is an example that I worked through this morning with ATC Brokers. At ATC Brokers, the minimum account for forex is $5K. Say I open a 5K account and only want to risk 1% of my capital, so let's say I take a position of 10 mini lots of GBP/USD. This will require@ 1800 of margin. on a $5000 account, there is $3200 left to be eaten before margin call. Say I sell at 1.5555 and have a stop limit at 1.5560. If the market gaps up to 1.55601 and keeps going, my position is open until somebody closes it. Whether by margin call, platform execution or me calling the trade desk. Not a problem if price stalls out just over my limit or retraces, but what if it keeps climbing 5-10 pips every minute for a couple hours and I am not able to manage it myself(rare instance for sure, but totally possible)?

Why would you use a stop limit order? You do not have to run that risk, asyou can also use a stop market order. It is true that stop market orders only give you protection in liquid markets. That means that you need to look for a liquid ECN, a suitable broker and thne trade a liquid pair. After all you are only a speculator trying to steal the money of somebody else.


DarkPool View Post
Why do none of the brokers have any mechanism for closing out when account margin has exceeded any threshold less than 100%. WTF? How can this be right? There is no rational, cogent argument I can come up with to support this policy except unfettered greed and avarice. Can someone on the "other side" perhaps enlighten me why I'm lost on this?

If there are regulations forcing us to use 50:1 and 500:1 leverage, why can't there be one that mandates that brokers have some way of trying to help their clients (the ones that want it at least) when shit gets crazy.

Really disgusted and dismayed... That being said, I am an experienced and profitable trader and this knowledge will not leave me crying on my mommy's shoulder, but wow, what a bummer.

Nobody forces you to use more leverage than you can afford. Nobody forces you to use stop limit orders either. The broker is not responsible for what you are doing. However, I would not trust any broker who is running an own trade desk with traders taking advantage of knowing their client's positions.


DarkPool View Post
P.S. Another thing I found out is that if you are looking into doing cme currency futures(mini contracts, not full size) instead of spot forex, forget it, the liquidity is absolutely dismal(for day traders).

The mini contracts are indeed illiquid. They are illiquid, because commissions are too expensive . But even with a small account of 30k it is no problem no trade the regular contracts.

It is true that I sometimes like to take the role of the devil's advocate, but this is because that I think we should be honest to ourselves

Forex is a huge gambling industry and it is not the average trader who profits the most. And as always, when it comes to gambling the dice are loaded.

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  #6 (permalink)
Elite Member
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liquidcci View Post
The first way to protect yourself is to trade a very liquid market where gaps are less likely or at least muted. Only trade when market is most liquid not holding positions over night. Personally if I do anything overnight I use zero leverage. Never have a position on that you are not monitoring. Be smart about using leverage. Never trade news reports.

I don't know about you liquidcci, but I don't get to decide when or how the markets do what they do, perhaps you do? A liquid market can turn into an illiquid one and vice versa in microseconds...


liquidcci View Post
Know how and exchange handles a gap past your stop. If the stuff I trade gaps over my stop it will immediately turn into a market order and fill. In a liquid market seldom happens and if does not much slippage.

That's nice to hear that your broker/exchange offers that, sounds pretty safe. NONE of the brokers I've talked to or platforms I've used work like this. Also, the word SELDOM doesn't seem to carry the same weight for you as it does me. All it takes is ONCE and you are down 10-20+% instead of your specified 2%


liquidcci View Post
I don't think it should be brokers responsibility when there are plenty of ways to protect your capital.

I don't think it is their "responsibility" either. They are a financial services company that specializes in executing trades for their clients because they pay them to do so. I need the service of closing my positions if I accrue too much drawdown in rare, emergency cases. Is this too high a concept to grasp?

There are many ways to protect your capital as long as you are in front of a screen, in reasonable health and have access to a phone. Life happens and there are times when this is not possible. Why is it so unthinkable for someone to want protection in situations where they are fallible? I'm not a cowboy, I don't have any bullshit pride telling me "I have to be a REAL MAN to manage my trades..."

We hire brokers to perform every single other function we need them to. I can think of no greater one than protecting me from financial ruin when something has gone wrong and I cannot. If they are not willing to do that, I move on.


liquidcci View Post
Have a sound plan that keeps you away from a broker ever having to liquidate your account. If you are wanting broker to protect and liquidate you to keep from getting a call your plan is a bad one. Setup a plan and trade in a way that never allows you to get close to that scenario. I personally hate forex better feels like the wild west. Better places to trade imo.

This sounds like a script for a nice after-school special liquidcci. Unfortunately, you miss the point. What I am saying is that I want a point where the broker says "hey, this guy isn't managing his trade, we'll get him out so he doesn't REALLY lose more than he wants (and we can continue to make commissions off his volume)." if I have asked them to do that for me. Why is that such a terrible and inconceivable solution???

Luckily, I have found ONE broker that was willing to fulfill my request and reduce leverage to 10:1 and margin call when my drawdown exceeds 2% of equity. I am comfortable that this offers me adequate protection from the market that I trade.

 
  #7 (permalink)
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Set a hard stop; problem solved.

Your problem is due to the fact that you are trading FX, there are no such problems with reputable futures brokers. You can easily have them set a percent limit on depreciation of account value.

 
  #8 (permalink)
Elite Member
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Fat Tails View Post
I love to argue, and I actually do think that leverage is based on position size.

Well Fat Tails, regardless of your legendary status here, you are wrong and your argument(or lack of) is ignorant. This is why... When you open 1 mini contract of M6B for day trading, you have only used up $20 of available leverage because futures day trading margins are 500:1. So, on a 10K account there is $9880 of equity to be eaten until margin call-when shit goes crazy, not talking about 99% of "normal" liquid market. If the position was leveraged at 10:1 price would have to move orders of magnitude further against you to see the same level of drawdown. At rollover, you will only use another $180 of margin to maintain the position, so $9800 to be lost on swing trade strategy(which I do not do)


Fat Tails View Post
Why would you use a stop limit order? You do not have to run that risk, asyou can also use a stop market order. It is true that stop market orders only give you protection in liquid markets. That means that you need to look for a liquid ECN, a suitable broker and thne trade a liquid pair.

I suppose you don't realize how redundant and ignorant this statement is.


Fat Tails View Post
After all you are only a speculator trying to steal the money of somebody else.

That was a snide, uncalled for, libelous remark Fat Tails. You might be, but I am not. I am a businessman looking to grow my business and work with people that want me to be successful and vice versa.



Fat Tails View Post
Forex is a huge gambling industry and it is not the average trader who profits the most. And as always, when it comes to gambling the dice are loaded.

You need to replace the word "Forex" with "Life" in that sentence and then you might understand further where I am coming from.


Last edited by DarkPool; December 12th, 2011 at 09:54 PM. Reason: Removed profanity
 
  #9 (permalink)
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DarkPool View Post
Well Fat Tails, regardless of your legendary status here, you are wrong and your argument(or lack of) is ignorant. This is why... When you open 1 mini contract of M6B for day trading, you have only used up $20 of available leverage because futures day trading margins are 500:1. So, on a 10K account there is $9880 of equity to be eaten until margin call-when shit goes crazy, not talking about 99% of "normal" liquid market. If the position was leveraged at 10:1 price would have to move orders of magnitude further against you to see the same level of drawdown. At rollover, you will only use another $180 of margin to maintain the position, so $9800 to be lost on swing trade strategy(which I do not do)



I suppose you don't realize how redundant and ignorant this statement is.







You need to replace the word "Forex" with "Life" in that sentence and then you might understand further where I am coming from.


You may wish to alter some of the language in this post, It's not proper to insult other members here.....Mike will admonish you if you don't, just letting you know.

 
  #10 (permalink)
Elite Member
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Lornz View Post
Set a hard stop; problem solved.

This statement is ignorant of the realities of the market. There is no hard stop in any market. Price can go wherever it wants as fast or slow as it wants. If you don't understand that, you have bigger problems than me...


Lornz View Post
Your problem is due to the fact that you are trading FX, there are no such problems with reputable futures brokers. You can easily have them set a percent limit on depreciation of account value.

Sounds like exactly what I am looking for. Would you mind mentioning the name of a "reputable, reasonably priced" futures broker that offers this?

I suppose I don't have enough capital, yet, to have an account with one of those brokers, because none of the 4-5 futures brokers that I have talked to recently(that were supposed to be reputable) do that.

The problem is that for each of the brokers I spoke to, 100% margin use(MB Trading lets it go to 120%) was the only point that they would have any interaction with my account. When it is in deep drawdown and the market has a larger percentage of my money than I would like it to have. None of them were willing to change this policy. These are "major name" futures brokers. Deep Discount Trading was the only one that will take you out when equity reaches $1000, but if it was $10K that's no favor to me...

Thanks for the info.


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