I think I've figured out why so many people lose money in Forex. I think that there are three main factors involved.
They would be commissions, leverage, and volatility.
The first factor is commissions. If a commission is 0.2, on 10k that's just 20 cents. Not bad, right? Wrong. You'll obviously need to close the trade so that's 0.4 pips roundtrip. Then if leverage is involved, such as 20x. You're paying commissions on 20x your money which means 20x the cost. So that 40 cents roundtrip just turned into 8 dollars per round trip trade, or 0.08% of equity. After just 12 trades, you've already lost 1%. 120 Trades and you've lost 10% of your account.
The next factor is leverage. I think that my calculator proves that it's near impossible to survive more than 3,000 trades with stop gain/loss of 50 pips and 1:20 leverage. Due to randomness in the Forex market, an account is very likely to suffer a string of bad loses resulting either in a very highly leveraged position to make back what is lost or a lower leveraged position but with more pips needed to make back what is lost.
For example, if you start off with $10,000 with 20x leverage and a trade goes against you by 250 pips, you've now got $5,000 left and you're now at 40x leverage. If you went back to 20x leverage, you'd have to make 500 pips just to get back to $10,000. Leverage causes Gambler's Ruin to occur much more severely.
The last would be volatility. How much your account will go up or down on a trade. A stop loss/gain or deleveraging will lower volatility which counteracts the Gambler's Ruin being caused by high leverage.
The best strategy seems to be decreasing leverage and increasing volatility per trade. So don't do anything less than 40 pips, trade more than 5:1 leverage, or not deleverage. The best theoretical ROI is probably 1x leverage and a long term position with no stop loss/gain since it minimizes losses from commissions and leverage.
They would be commissions, leverage, and volatility.
The first factor is commissions. If a commission is 0.2, on 10k that's just 20 cents. Not bad, right? Wrong. You'll obviously need to close the trade so that's 0.4 pips roundtrip. Then if leverage is involved, such as 20x. You're paying commissions on 20x your money which means 20x the cost. So that 40 cents roundtrip just turned into 8 dollars per round trip trade, or 0.08% of equity. After just 12 trades, you've already lost 1%. 120 Trades and you've lost 10% of your account.
The next factor is leverage. I think that my calculator proves that it's near impossible to survive more than 3,000 trades with stop gain/loss of 50 pips and 1:20 leverage. Due to randomness in the Forex market, an account is very likely to suffer a string of bad loses resulting either in a very highly leveraged position to make back what is lost or a lower leveraged position but with more pips needed to make back what is lost.
For example, if you start off with $10,000 with 20x leverage and a trade goes against you by 250 pips, you've now got $5,000 left and you're now at 40x leverage. If you went back to 20x leverage, you'd have to make 500 pips just to get back to $10,000. Leverage causes Gambler's Ruin to occur much more severely.
The last would be volatility. How much your account will go up or down on a trade. A stop loss/gain or deleveraging will lower volatility which counteracts the Gambler's Ruin being caused by high leverage.
The best strategy seems to be decreasing leverage and increasing volatility per trade. So don't do anything less than 40 pips, trade more than 5:1 leverage, or not deleverage. The best theoretical ROI is probably 1x leverage and a long term position with no stop loss/gain since it minimizes losses from commissions and leverage.
Attached File(s)
Effects of leverage with comissions.xls
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