The difference in performance due to use of excessive leverage happens in two ways:
a) When we are trading using the Money Manager to calculate the size of our trades, we have the lots sizes assigned as a percentage of the Free Margin in the account. If the leverage is too high, the size of lots would go up too.
When we figured out the best amounts to trade in our default settings, we used 100:1. We made sure that even if you have orders opened for all pairs, you would never get into an over-trading situation that could trigger a margin call.
We have tested this percentages and found that they work fine, never a margin call.
But if you push up the leverage, the lots will be increased with the extra available margin, and you could find yourself over-trading to dangerous levels.
b) When we have losses, our capital is decreased. If you trade with small leverage, your losses will be small. But watch what happens with increased leverage:
Let's say that you have an account of $1000, for example, and you are using the recommended 50:1 leverage (maximum legally allowed in the US, and for good reason).
Let's also assume for this example that 1 pip= $1 in the size lots you are trading on the $1000 account (keep the figures simple).
Imagine that on a bad week you lose 100 pips. Given your lot sizes you would have lost $50 using 50:1 leverage (5% drawdown is normal for us).
But if you had been trading at 500:1, you would have lost $500 because your lots would have been that much larger. Now instead of a 5% drawdown, you now have a 50% drawdown on the account!
To get back to your starting point you now have to make $500 profit instead of just $50.
Now let's say that the next week is a really good week. BUT, your account is now only $500, which means that your trade sizes are going to be half the size of the trades you took in the losing week, (because the MM will always calculate on available margin).
To get back to your starting point you now have to make twice the number of pips to make up the loss, because each pip at half-size lots will only pay you $0.50 (whereas your losing pips cost you $1.00).
To recap, in one losing week you lost 100 pips and the next week you won 100 pips. If your leverage is 50:1, you are pretty much even because the size of your trades is more or less the same, since you only have a 5% drawdown. If you are trading 500:1, your lots will be half-size and with 100 pips you will only make up about $250, to keep figures simple, because the size of your wins were much smaller than the size of your losses. You lost 100 pips, then you recovered the 100 pips, but you still have a $250 loss to make up! You still have a 25% drawdown, even though you made up the pips!
That is the difference.
Basically, in Forex the main concern in not how fast you make your profits, but rather how much you can control your drawdown, so the size of your trades remains more or less the same, or hopefully grow at an even pace
One of the problem with EA trading is narrowing down the possible market conditions to the most predictable patterns. If you trade the news, for example, you will find all kinds of market responses, from NFP wild volatility, to complete apathy in some cases where the news were anticipated. If you are anticipating either one of the two examples, and get the opposite one, you are in a bit of trouble, and that is the main problem with news trading for an EA.
We try to "standarize" the kinds of markets that we wish to participate, by filtering volatile times, news time, etc.
In our Breakout strategy, we avoid news spikes and wait for the trend to confirm itself as a viable move 15 minutes after an important report. We also avoid those typical times of "back and forth" action, such as the London morning, Dow opening, etc.
In this manner, when we enter a trend, we have some degree of certainty that it is not just a news spike, or a false breakout. It does not always work, of course, but the probabilities are on our side, and also the long term profitability.
When it comes to scalping, the situation is even better, since we only scalp when most of the markets are asleep. That is a sure way of making market conditions similar. After London closes and before Australia and Japan open, we have a good degree of certainty about the number of participants in the market, the anticipated news announcements or general political gossip that might upset the market, etc.
Furthermore, each scalping pair has its very own schedule:
EurAud and EurChf, start at 16:00 just as soon as Europe closes, assuming other scalping conditions and volatility requirements are met.
EurCad, however, waits until the oil market closes in NY (18:30 gmt), since the Cad is highly affected by oil prices. UsdJpy also enters at 18:30.
Finally EurGbp enters at 19:00, because with this pair we scalp a very narrow channel, and want it to be very quiet to perform best - entering sooner will find you "off channel" for long periods of time, should there be the slightest trend leftover after Europe closes, which would waste the whole day waiting for it to "come back", instead of scalping away once the dust has settled into a narrow "scalping" channel.
Granted any trading strategy, and therefore any trading EA, has markets conditions which would cause losses. But the more homogeneous the market conditions, the easier, more controlled action we can expect.
Long live scalping!
Hi Traders:
EurChf and EurAud. These 2 pairs are notorious with brokers who push up spreads during the scalping hours to get rid of scalpers.
Different spreads will lead to different fills and different results.
Different fills can even affect performance between 2 accounts with the same broker!
This is normal since they are actually buying and selling us currency contracts, it's not just a number, like it is in a Demo account (hence the difference in performance between Demos and Live accounts)
Once two accounts are off sync, the results may vary for the rest of the day.
This happens in all kinds of trading: If, for example, we both put a buy order for a stock, at the same time and with the same broker, we are also going to get slightly different fills. That's trading, buying and selling at a price that changes constantly.
In the case of Forex, and particularly of scalping, which is rather high frequency trading, that may happen relatively often.
You may get into a trade that I did not get into, because the market reversed at just that point.
From that moment on, our two accounts are out of sync.
If we are with the same broker this may happen because I did not get filled and the EA's signal went away on the reversal, sort of missed the chance for the trade. This often happens with variable spreads, like in ECN brokers. The funny thing is that occasionally you could actually benefit (even with worse spreads) because you are not hooked with that order. If the trading session ends, you will not enter more trades that day. So even though I got my order filled, I may be stuck with a losing position and you got spared: I may be facing a Stop Loss, which may account for the different results you are seeing.
This is a rare case, since usually worse spreads mean worse performance overall.
If you have a different broker who never had that price available, then you don't get to place the order at all. This is how it works:
Let's say that the price is 1.00000 and my broker has a 2 pips spread. My broker will sell at 1.00020 and my EA will be able to enter a "buy" order at that price. Your broker, who may have a 4 pips spread, will not even offer the chance to buy at my price: they will offer you a 1.00040 price, because of the higher 4 pips spread. Your EA won't send that "buy" order because it does not want that price, since it is not a good "buy" according to the strategy. The EA would like to buy at 1.00020, but not 1.00040.
If the price reverses at that point, I am now in a trade and you are not. And so it begins.
If I am busy with my trade when you are not, you could enter a trade the next time a signal comes along, which may in opposite directions than mine.
If the price action remains normal and the price keeps bouncing up and down, both you and I will make money in time, even though we are out of sync. However, if the price takes off in one direction, your position may clear at a win and mine at a loss, or vice-versa. Luck of the draw, it could benefit you or me, but it will not be the same.
That's Forex!
Guest post - by Robert
