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April 11th, 2009 at 8:25 am

Trading Forex without (much) leverage.

There are a lot myths about how much money can be made trading currencies. Some promoters of trading systems and other products claim truly fantastic returns. Just few days ago this is a google add that popped up on my computer: “3 Currencies Set To Surge – 3 Currency Trades Could Turn Every $500 Into $522,053 -Free Report”. Somebody is paying Google to spread this message. This short statement doesn’t say how long it would take to make half a million out of every $500, a 1000 times increase (!!!), but most people who see it are likely to assume promoter is not talking about a waiting time measured in decades. Most likely a year or two. This would be a bold claim, but how realistic is it?
There are many people who say that they made a lot of money in very short time trading Forex. While most of them are an exaggeration or outright lie, some of the claims are probably true.
One of the reasons traders are drawn to this market is availability of very high leverage. This allows to hold large position with a small amount of money. If market moves in the direction of the trade, gains are multiplied by the amount of leverage used. For example, somebody using no leverage needs $100,000 in order to open 1 standard lot position. Taking EUR-USD, the most popular currency pair, as an example, gain of 100 pips, which is less that average daily move currently, would produce $1000 profit. Not bad, it is 1% return. Now to enter into the same trade using 100:1 leverage, only about $1000 is needed. The same 100 pips gain would effectively double this account. We can certainly see this is attractive to a lot of people. If this could be done few times in a row, then yes, it is possible to make serious money. Unfortunately, no trading strategy is perfect and when a loosing trade comes, huge leverage has a potential to put an end to a trading career, or at least kill the account. This is what happens in most cases of the trading systems that rely on excessive margin – eventually they fail after one or more loosing trades.
Trading without any, or with low leverage doesn’t seem to be “sexy” to a lot of people. How much money can be made taking few pips a day? That is, if the trading strategy used is even profitable to begin with. Traders working for institutions, in most case do not use leverage, or it is very small. I wrote about results they achieve in “Forex pros“. Most readers would find those returns disappointing. Individual trader has much more leeway about margin and it can be tailored to one’s trading style and risk tolerance. It is very difficult to say what margin is “best”. Satisfactory balance for given market approach must be found by, more less, trial and error, but basically lower leverage, especially at the beginning, is better. I consider 10:1 and higher leverage to be too high for most people. While it is great to have the option of having  high level of margin available to us, it is probably left alone or saved for some “special” circumstances.
The trades taken in this blog are a small part of my total activity. Some of it has to do with systematic, mechanical trading, which I don’t cover here. What is documented on these pages is my discretionary trading. These trades are spread over 4 different accounts. Late last year I liked what this part of my trading was going and decided to open new, larger account. Account is under a corporate name. Single trades taken here are for the most part at cash value or 1:1 leverage.
account-ealyr-january-e.jpg
This a snap shot of activity in early January, right after account was opened. It  was funded with $120,000 and the first trade was for 120,000 units. About 90% percent of all trade are at this ratio. The balance is at 2:1 leverage.
account-laterr-january-e.jpg
Here is how this account looked in mid January. I allow myself to have up to 5 positions opened at any one time. This brings “effective margin” to about 5:1, basically as high as I dare. Most of individual trades are still 1:1. For the large part I don’t have more than 2-3 trades in this account at any one time. As the account balance increases, trade size also gets bigger.
account-laterr-february-e.jpg
Later in February some longer standing trades were closed. Once again with increased account balance, trades get exponentially larger. Compounding at work. This is very important concept, one that deserves its own post, well , more like a book.
account-mid-march-e.jpg
Here is the same account about a month later. New trades keep getting bigger in line with account gains.
That was a very good stretch for this account. Drawdowns were small, about only 3% based on closed trades. At some point for a brief moment open positions were in a hole to about 8%. This is not very much, as far as my risk tolerance goes. It is not unusual for these type of accounts to be in red as much as 20%, especially if I happen to have couple of trades using daily charts. That’s why I trade more than one account, to spread risks. Even if one gets into a hole and I have to sit and wait for a while, others can still be traded, and, hopefully, do better.
account-large-snap-e.jpg
This is a view at the account as it was last weekend, when I started to prepare this post. It shows one of those rare situations when larger size trade took place. A buy in GBP-JPY was double the customary value. Chart shows half the trade just closed while  the rest is still open. An example of about 2:1 leverage used on a single trade. This trade was covered in greater detail here.  We can see account balance, showing realized gain of over $106,000 since the account was opened and unrealized gain, on positions that are still live, over $12,000. Together account grew by about $119,000. For all practical purposes, it doubled in three months. All without using too much margin. I don’t think that any time it was higher than 5:1, remaining at about 2,5 : 1 on average.
These results are above the “curve” and not likely to continue. I would be very happy if I could double account of this size once a year, taking similarly small risks. But this should illustrate the point that it is possible to achieve good returns without using huge leverage Money will be withdrawn from here and the account will brought down to about original size. Few months down the road I’ll take a look at this account again and share the results.

Mike K.
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  • » Trading Forex without (much) leverage. | fxmadness.com » Forex Trading Experts
    9:24 am on April 11th, 2009 1

    [...] news by admin « Practical FX Trading Education: Forex career a safe haven during … Forex [...]

  • G.R.
    11:09 am on April 11th, 2009 2

    I knew I wouldn’t regret digging through your blog today. This is good post. I have so many questions about it. Can I send you email?

  • admin
    11:44 am on April 11th, 2009 3

    Yes, send it mike@fxmadness.com

  • Pages tagged "forex"
    2:07 pm on April 11th, 2009 4

    [...] bookmarks tagged forex Trading Forex without (much) leverage. | fxmadness… saved by 5 others     koreanpunkgr93 bookmarked on 04/11/09 | [...]

  • B.J
    7:43 pm on April 11th, 2009 5

    Glad to see you finally decided to answer the question about returns you are getting. You think these are above average results. Why do you think that, given the fact that you are very carefull and have a high percentage of winning trades?

  • Michelle
    7:51 pm on April 11th, 2009 6

    These are great results, especially for a fairly large account. Frankly, I always doubted the 1:1 to ratio you keep talking about. It takes discipline to not to get overconfident and start trading bigger amounts. So, when do you start that mentorship program?

  • FX
    11:16 pm on April 11th, 2009 7

    Thanks on this open and detailed post.

  • admin
    3:30 am on April 12th, 2009 8

    B.J., it is impossible to double account every few months or so for any stretch of time. Yes, I did have a large percentage of winning trades, but this will not last forever

  • admin
    3:41 am on April 12th, 2009 9

    Mentorship program, Michelle? I wouldn’t have enough time to trade. Besides I’m not sure how effective this is over phone or internet, without personal interaction. It is always much better to sit right next to your teacher.

  • Heather
    4:57 am on April 12th, 2009 10

    I’m with Andy here. Find it difficult to understand why you don’t think these result can be repeated, given your trading style. But you know better what it is you are doing. I’m happy to say that since I started to read your blog regularly my trading improved. Find it easier to wait for a trade, can get out when the trade hits target without hoping for more. Also, started to use less leverage and find myself less nervous. Thank you.

  • Stan
    4:59 am on April 12th, 2009 11

    This is very good post, but it makes me envious. Good job.

  • admin
    6:20 am on April 12th, 2009 12

    Very good, Heather. Keep it up and I’m sure it will get better still.

  • admin
    6:23 am on April 12th, 2009 13

    No need to be envious, Stan. With some work I don’t see why you shouldn’t get better results.

  • Michelle
    7:43 am on April 12th, 2009 14

    No plans to teach in immediate future? Too bad. But the blog will go on, right?

  • admin
    7:50 am on April 12th, 2009 15

    Yes, I will probably keep at it for some time.

  • Ihor
    12:34 pm on April 13th, 2009 16

    Hello Mike! It’s great pleasure to me to read your blog. You make excellent job. But i have question to you. You always post your calls (or trade setups) without defined stop-loss. In a picture of GBP/JPY trade you’ve entered 142,08 and exited (maybe partial) at 148. But price was also 136. So, you risk/reward ratio in this trade is nearly 1:1. And i haven’t see any stop-loss on the chart. Sory, for so too private comments. But i really want know about your stop-loss technique. Thanks a lot. Best regards!

  • admin
    7:03 pm on April 13th, 2009 17

    Thank you. That trade didn’t have a stop order at all. As a matter of fact I would have added if the price dropped to as low as 130.00. This was talked about in one of the posts. I waited for this trade some some time and not sure what post it was in. I’m still sitting on half of that trade and looking for 162.00. If the price drops to 130 I’ll buy again. This trade was taken using daily chart so large swings (comparing to others) are allowed. I will be buying smaller swings, too, but in different accounts.
    Some trades have a fixed stop/loss, like the one from yesterday. I trade few different techniques here, so S/L’s are different, but most of the time I look at a price behavior around previous high/low, 100 SMA, Fib numbers or best combination of them. It is different almost every trade. That’s why it is discretionary not systematic.

  • Vitaliy
    6:24 am on May 24th, 2009 18

    This is one of the best pieces on trading I ever reasd. Great job!

  • Wang Lee
    4:34 am on May 30th, 2009 19

    Dear Mike, I started trading forex since last couple of weeks. Unfortunately, i made losses using 200:1 leverage initially. Then, my account manager suggested me to use 100:1 leverage. I still made substantial losses.

    Now i dont want to try leverage at all. I cant afford to lose anymore. So, i did a google search on trading forex without leverage or 1:1 leverage. To my surprise, mostly all people love the leverage feature and says its the best thing in trading forex. I do not understand how…

    I agree that using leverage, i can just invest 20 $ and still trade 2000$ and with little movement in market I can make 100 % profit , this is good feature… yes… But it worked opposite for me..

    Why not i invest 2000 $ , and trade 2000 $…
    I dont mind waiting until the market goes in my favor…
    I dont mind holding up 2000 $ for a long time,
    I dont mind taking small profits like 5% or 10 % for holding 2000 $ in an open deal,
    As long as i can get a guarantee that I will NOT lose a penny…

    I just came across your blog and i was glad to see that atleast you and few other people here feel trading without leverage or less leverage ( 2:1 )is not wrong.

    I would love to know, if anyone feels i am wrong.

    thank you.
    Email: lee.hardware@hotmail.com

  • admin
    7:54 am on May 31st, 2009 20

    Hi Lee, I will address some of the issues you raised here in my next post.

  • No leverage Forex, again. | fxmadness.com
    8:06 am on May 31st, 2009 21

    [...] I probably will not do again this year. The earlier post mentioned at the top of the page is Trading Forex without (much) leverage. It is suggested to read it if something here needs explanation. At any rate, here is a comment [...]

  • Half year mark. | fxmadness.com
    7:39 am on June 28th, 2009 22

    [...] software or robot, hence “discretionary” trading. In early April I went over my sample results for first quarter of the year. That post focused on not using much leverage and this trend continued. Most of the [...]

  • how much would you NEED??? - MoneyTec 2.0 Social Networking Community
    8:34 am on August 22nd, 2009 23

    [...] You would need 100,000 or so (depending on the pair traded) in order to trade full lot without leverage. You don’t need that. There are brokers who allow trading in much smaller size, either mini account, or even any size imaginable, like $1500, or $22,222 [...]

  • GeneTinsley
    5:28 pm on October 9th, 2009 24

    Hey, great blog…but I don’t understand how to add your site in my rss reader. Can you Help me, please :)

  • Leo
    5:45 am on January 17th, 2010 25

    Dig dig dig…:)

  • Hamza Akbour
    2:00 am on February 25th, 2010 26

    To all of you out there, this is a great blog!!! I am in forex market for a year and half, and at the end I got to the conclusion that leverage is a killer that will blow up all your savings. Maximum leverage I can suggest for anyone, I said max is 4:1. from my experience, there is no way you can lose if you go 4:1 or lower. I am sure it is not attractive, but in the long run, you will succeed and compound your earnings. I learned about leverage the hard way, but thank god I only blew up one live account which is not a waste, but I look at as if I went to the university and paid for classes to get experience.
    Thanks for sharing these info with us.

    The law of giving and receiving helps. give ideas and you will get more ideas from someone else.;)

    Happy trading everybody.

  • ahmed
    12:27 am on August 29th, 2012 27

    Dear sir
    i need to open forex account with a broker allow 1:1 leverage “my broker not allowing me to trade less than 50:1

    Help appreciated

    regards

 

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