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Assume two investors with $100,000 each, willing to invest them in Forex as scalp.

Investor (a)

  • Funds a brokerage account with the full $100,000
  • each trade is executed with the full $100,000.
  • trades with no leverage
  • set a stop-loss to 1% of the investment ($1,000) per trade

Investor (b)

  • Keeps $99,000 safe in his/her bank account.
  • Funds the brokerage account with only $1,000
  • each trade is executed with the full $1,000
  • trades with 1:100 leverage (just trade broker leverage, not banking)
  • doesn't place any stop loss

Both investors execute the same trades.

Are these two strategies effectively the same in terms of risk and expected financial outcome? Will both get to the same final outcome? Is option (b) safer and therefore recommended to maximize benefit while minimizing risk or does it have any flaw in the logic?

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  • Not a direct answer, but be aware that a stop loss rule may provide you with less coverage than you think, if there is a gap in pricing after some announcement, say interest rates, and your broker can only close your position at a price lower than you had anticipated.
    – Grade 'Eh' Bacon
    Feb 8, 2021 at 19:27

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Are these two strategies effectively the same in terms of risk and expected financial outcome?

Nope.

Investor B will have a different outcome - plus or minus - because he will have to pay (or get) interest rate for the leveraged amount. Over longer sideways market this may make a difference that is nontrivial.

That basically is the difference. 2nd investor basically has to borrow the position funds and that can cost (or get) some money.

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  • Investor B will also get interest on the bank account - but of course that's likely to be less than the interest paid on the leverage. What about maximum expected losses, i.e. the effect of the stop-loss versus the effect of margin calls leading to forced closes?
    – GS - Apologise to Monica ♦
    Jan 9, 2021 at 17:00
  • Given the pathetic interest paid on most bank accounts you can seriously ignore that.It is what - 0.00000001%? And in some areas it is going negative. Max expected loss is "identical", though per law in some areas B may be better (no obligation to pay negative balance). This really depends on jurisdiction and broker, though.
    – TomTom
    Jan 9, 2021 at 17:13
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    Question is oriented towards risk. I assume that leverage interest is minimal as the question implies scalp with short positions.
    – null_pointer
    Jan 10, 2021 at 2:21
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    Point is that the leverage interest IS NOT MINIMAL - particularly not if the account is funded with only 1%. You can loose a significant portion of the account in a month to the leverage fees in this scenario which - in my universe, and that one has a LOT of money involved - is significant.
    – TomTom
    Jan 10, 2021 at 8:49

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