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Questions About Forex, Low Profits, and Leverage

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Hi,
I've been looking into trading forex and I have a strategy in mind. The problem is that profits seem to be extremely low for a huge amount of risk. I've been noticing that when I purchase about 15,000 units I'm only getting a tiny profit. Event with a leverage of 25:1 or greater it doesn't seem normal to only make $30 bucks or so. Is there something I'm doing wrong?

AddSecurity(SecurityType.Forex, "EURUSD", Resolution.Second, fillDataForward:true, extendedMarketHours:false, leverage:50);

LimitOrder(sym, shareCount * 25, symbolPrice);
StopLimit = StopLimitOrder(sym, -shareCount * 25, symbolPrice*(1m-.03m), symbolPrice*(1m-.03m));

Are there any example forex algorithms? I've done research but didn't pull up anything that was very useful.
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11 Comments
 
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.

Hi Travis,

From the data of Oanda, the so called top trader usually take profit with 8 ~ 12 pips per trade.
https://www.oanda.com/forex-trading/analysis/top-100-forex-traders-statistics

$15000 for $30, sounds reasonable from above data.
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Heh yeah, I took a look into Forex recently, thinking I could be clever and figure out how to conduct arbitrage by finding inefficiencies across chains of currencies. I could very well be completely unversed in trading on Forex, but what Casper quotes makes a lot of sense. Certainly backs up the high risk, low reward observation you made, Travis.
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Conversely you probably only risked $30 as well? I think people tend to trade 100k-1M per trade with fx because the allowed leverage is so much higher (i.e. account with $1k could trade 100k, and given your trade above would yield $200 - 20% return on a trade)
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.

$1k could trade 100k

Oh... wow. As someone who thinks up worst case scenarios more often than he should... A sudden 10% drop on 100x leveraged $1000 is giving me heartburn.

I wonder how often something like that happens.
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Check out the EURUSD drop in the last 6 months! 1.12 to 1.02? Its rare but it happens. The overnight rise of the swiss franc put many brokerages out of business! (Francs unpegged from the USD and rose 30% instantly)
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.

I think you're right @Casper Mak. I've done more calculations and I've come to a couple of conclusions.
@Jared I was actually risking about 1500 but it seemed strange to have low profits. I realized that my leverage was incorrect and in forex a position size of about 30k, really isn't that much.
@Stephen People say that Forex is supposed to be less complicated but it seems to be more complicated than stocks to me. Like anything though it will get easier with time and I think it will be interesting to see which of these endeavors is more profitable.

100:1 leverage can be risky if you invest too much. With a leverage of 100:1 you could easily wipe out your account by going "all in". Let's say you have 100k in the market and the price rises so you make 101k that's 100% gain and now your account is worth 2k, conversely if the price falls to 99k then you lose 100% and wipe out your account. Not a good situation... but it would be stupid to trade like this.

The U.S. allows a maximum leverage of 50:1 or a margin of 2%. lets say I want to risk $300 bucks and purchase EUR/USD. I could multiply 300 by 50 and get $15000 worth of buying power. If you divide 15000 by $26 then you get about 576k worth of currency. If the price per pip is .10 then you just do .10 * 576 and you can get about $57 per pip. This still seems a bit risky to me so I would probably go with a lower ratio.

I'll have to do some more coding but I think I've got the basics down.
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I believe I read somewhere that Limit and Stop orders are not implemented in the brokers, meaning, it's QuantConnect that provides this functionality. Is this correct?. If it is, how you ensure that a stop order will be filled in case of a sudden drastic move?.
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@nsampietro - The supported order types depend on the brokerages. Most brokerages support limit orders, but not all support stop orders. Which brokerages are you using? FXCM supports stop and limit, and so does Oanda.

Some brokerages don't handle "zero-crossings" well -- i.e. when you are long 10, and sell 20, you cross zero to -10 holdings. Interactive Brokers handles this seamlessly but with other brokerages we break the order into two pieces (sell to close, and sell short). This is abstracted away inside of LEAN though so you don't need to worry about it.
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.

I'm planning to use IB. Does Interactive Brokers support limit and stop orders ?.
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Interactive brokers supports many order types, including those yes. LEAN only supports Market, Market on Open, Market on Close, Limit, StopLimit and StopMarket.
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.

I was looking at the back test for FOREX in QuantConnect as well and was wondering, whether the back tests include all fees (it does seem to include $2 per trade) like roll over charges, etc?
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.

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