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.
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.
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.
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.
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.
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.