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May 31st, 2009 at 8:06 am

No leverage Forex, again.

Subject of Forex trading with little or no leverage, turned out to be popular. I received fair number of emails related to that post. Just yesterday a comment was placed there, which I think warrants an extended response, hence return of the topic. This not something I intended to write about today. Going on my fishing trip I thought that a picture of a record breaking halibut could be posted here. Or at least one large enough to brag about. Sadly, I didn’t catch any halibut. One skate an a large lump sucker, an even uglier fish, were my only triumphs. Other members of my party did hook halibut, but none was large, with 32 pound fish tipping the scale. All were released, if anybody cares. But there was one more consequence of the trip – severe sunburn. So, apart from not catching anything and being extra crispy now, the trip was great. It shouldn’t be a surprise that sport fishing is not my favorite activity, something 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 that was placed there yesterday:

“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.”

Author also posted his email, which I left out here, but it can be seen in the original comment.
No, there is nothing wrong with using little or no leverage. In fact, real professionals, big time traders for banks and Forex funds, rarely use significant leverage. Most novice traders are hooked on the large leverage because it offers a POSSIBILITY of making a lot of money fast. Yes, it is indeed possible, but extremely unlikely. Most probable is the outcome described above, fast and severe losses. Author of this comment is not alone in this experience.
This was covered in my original post. Here I want to expand on what Lee wrote in his comment

“Why not i invest 2000 $ , and trade 2000 $…”

Not all Forex brokers will allow you to trade in such small lots, but it is possible. In fact, there is at least one broker which lets you trade in any size you want between $1 and $10 Million. It is OANDA.com. This scalability function also plays important role when it comes to increasing gains through compounding. Increasing size of trades in line with account gains does wonders to bottom line over time, but this is a subject for separate post.

“As long as i can get a guarantee that I will NOT lose a penny…”

Unfortunately, trading with little or no leverage doesn’t guarantee profits. It will help you stay solvent for a long time, and maybe even prevent total loss, but in itself is not a ticket to sure gains. It still has to be combined with a winning trading strategy. Anybody who guarantees certain returns should be avoided. Which brings me to the next observation.

“I dont mind waiting until the market goes in my favor…”

There indeed is a Forex market “wisdom” floating around that currencies will always return to any previous level. This means that if you enter into a position and you are wrong, by using no leverage you can wait it out and, eventually, market will turn in your favor and trade will produce profit. Well, this is at best questionable. For example, anybody who went long GBP-USD above 2.0000 in 1992, had to wait 15 years for the price to return to that level. And, right now, who knows when we’ll see 2.0000+ again. Next year or ten years down the road? I wouldn’t want to find out with my own account. If it works for some people, that’s great, although it is only a matter of time before situation described above happens. Myself, I prefer to take a loss, and given small margin used, any single loosing trade is not catastrophic.

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

You are absolutely not wrong. As a matter of fact, using large, excessive leverage is wrong. Just don’t expect to turn $2000 into $2 Million in few months. On the other hand, by trading at cash value, account should last for a long time, even if a winning strategy is not discovered right away. It is about finding balance in personal tolerance between risk and reward.

Mike K.

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  • Allen Taylor
    8:46 am on May 31st, 2009 1

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  • Heather
    8:56 am on May 31st, 2009 2

    Sorry to learn about your troubbled trip, but I would imagine that of all the people you would know how to catch halibut. Or any other fish.

  • Michelle
    8:59 am on May 31st, 2009 3

    Yes, Mike. What’s up with that?

  • admin
    9:05 am on May 31st, 2009 4

    You two should hit a commedy tour. Together.

  • admin
    9:08 am on May 31st, 2009 5

    Thank you, Allen.

  • Damian
    10:17 am on May 31st, 2009 6

    Mike, what was the name of the place you went fishing and how is it rated?

  • admin
    10:39 am on May 31st, 2009 7

    We went to Neah Bay, which is supposed to be the best halibut site in Washington. I don’t know for sure, sports fishing is not of great interest to me.

  • FX
    11:22 am on May 31st, 2009 8

    “Why not i invest 2000 $ , and trade 2000 $…”

    Because you are not here for 2000$. It’s not enough for you. You can buy to few “goodies” for it. You probably want at least 200 000$ for all things you need or want. It’s ok, but then you would have to put in 200 000$ at the first place.
    You probably can start with 2000$ but I don’t believe you are wiling to compound 6.5 years if you can make 100% a year with your original stake.

    Just my 2c

  • admin
    6:58 pm on May 31st, 2009 9

    I think the original sum was higher than 2K. This is probably what is left after losses.

  • Thomas
    7:17 pm on June 1st, 2009 10

    I think you can play with high leverage as long as you have enough money “allocated” to trading. You can have it somewhere else, where you get interest and top up or drain (much better – like Mike) money from your account. Just hold enough to cover your open trades.

    Or try to hold your margin in another currency, that has short term interest rates at least above zero. E.g. AUD.

    If you put, let’s say $100k in your OANDA account you have to think about a potential default too.

  • Paul
    9:03 pm on June 1st, 2009 11

    Although my experience with high leverage is similar to the author of the e-mail (I lost a lot of money quickly), I have different conclusions.

    As you said Mike, whether you trade with 200 times leverage or 100 or none, you cannot guarantee you will not lose money. The leverage does not cause the losses (or the wins), it just amplifies them and speeds up the conclusion.

    I am actually thankful for the lessons I have learned trading with leverage in FX. Like most people I have owned stocks which I bought with no leverage. Trading with no leverage allows you to be a pretty crappy trader (investor) with poor habits and still not run out of money. For instance, when I trades stocks, I never used a stop loss. Or an entry type order. I usually didn’t even have a profit target. I just thought “this company looks like it’s going up, I’ll buy it.” With no target or frame of reference it is really hard to make sound judgments on whether to keep or sell the stock. If the stock went down, I just waited to see what would happen later. If I got tired of waiting, I unloadeded it at a loss. If on the other hand it went up, I was happy…but I often let it come back down again before taking profits. Very inefficient.

    The leverage aspect of FX speeds things up. It forces you to adopt better habits. You quickly learn to use a stop loss so that your account doesn’t get destroyed. Better yet, it forces you to wait for the right entry point or use an entry order to get the best price. It also makes you think about your profit target and the timeframe you expect to get that profit in. If you don’t do these things, you will be finished with FX in a few weeks.

    My answer to losing big money with leverage was not to take away the leverage — it was to go trade in a micro account and only trade one lot. Now I am back to my normal account (10,000 unit lots) but I still trade one lot at a time which is a VERY small percentage of my account balance. And I have fixed a lot of the bad habits that made me lose money in the first place. So now I would say that I am “bouyant”. I know how to avoid making big losses. And I make enough wins to cover my loses. I just need to hone my strategy so that I can more consistently win and increase the number of contracts.

  • Wang Lee
    4:10 am on June 2nd, 2009 12

    Dear Mike,

    I would like to thank you for explaining me in so much details. I really appreciate your effort.

    I have started trading on low leverage. I initially thought that I will hold up an open trade unless i see profits before closing the deal. On a contrary, you mentioned that at times in case of losses, its preferable to take the loss. Now, i would like to know, when is the right time to make this decision of taking the loss. In cases of loss, its quite common to feel, that the rate might change soon.. and u keep waiting for it, until you find that now its too late to take the huge losses.

    lee.hardware@hotmail.com

  • Danielle
    4:46 am on June 2nd, 2009 13

    Very interesting observations. You are right – traders like leverage. The small percentage of traders prefers trading without any leverage. Good luck.

  • admin
    7:56 am on June 2nd, 2009 14

    Thomas, possibility of default could be a thing of the past soon. Within year-two we will see Forex brokers starting to offer either insurance for funds, or some kind of segregation guarantee. Pretty much the only way left to set yourself apart from other brokers. I expect these offers to start showing up soon.

  • admin
    8:08 am on June 2nd, 2009 15

    Paul, the way I see it leverage is a tool and not something either bad or good. Ultimately everybody has find own comfort level when it comes to leverage, strategy efficiency and risk tolerance.

  • admin
    8:17 am on June 2nd, 2009 16

    Lee, it depends on your strategy. Nobody is right all the time, so part of creating a strategy is defining conditions ( level) for admitting that you made a mistake and cutting losses. Before you enter a trade you should decide at what price market proves you incorect, a stop loss. It seems to me that maybe you should trade demo account for some time, practice, before risking any more money. You don’t have to rush things, markets will still be here in a few months.

  • Truden
    7:43 pm on July 29th, 2010 17

    Greatings, Interesante, no va a continuar con este art?culo?
    Have a nice day

    [url=http://www.affhtf.com/]Truden[/url]

  • David
    11:07 pm on September 9th, 2010 18

    Leverage is fine with a working system… If I have 100:1 then I make $10 from a 100,000 size lot with a $1,000 down payment.

    If I have 500:1 then I make $10 from a 100,000 size lot with a $200 down payment.

    Essentially, leverage – used with good managment – is actually less risky as less of your money is exposed per trade.

    The ugly side of leverage arises however when traders mix leverage and greed together: “Oh wow, from 100:1 to 500:1… that means I can then trade 5 times more per trade. Woot!” They are the ones who loose big and put a bad name on leverage.

    Frankly, people should have a choice. And those who are greedy should have to undergo assessment and / or be taught inorder for brokers to give them extra leverage. It would be certainly better than the decision CFTC has made in the US.

    Leverage wasn’t why that person lost his money fast. He clearly wasn’t using money management and stop losses.

  • Paul Barent
    1:54 am on January 6th, 2011 19

    Great Post..

    I had the feeling that its virtually impossible to determine the direction of a pair short term (daily). So i guess only longer term , low leverage trades make sens. Or a currency ETF perhaps?

  • Mujeeb
    7:53 pm on January 23rd, 2012 20

    I think this post is a must read for anyone trying forex without much experience, have not seen much in this post recently. I would like to ask Mike how is his strategy of no/low leverage working, what sort of annual returns should one expect with a no leverage forex account? I have seen many managed account giving their no’s all over the place, i have no plans to go with any though. Thanks Mike in aniticipation.

  • admin
    8:07 pm on January 24th, 2012 21

    Hi Mujeeb,

    Whether using leverage or not, in the end results will depend on the strategy itself. Leverage will simply magnify the gains and losses. If you use no leverage at all, you need to clear about 10,000 pips in order to double the account. That is without increasing the size of trade as the account growth. If the position size is increased every time the account registers a new high, you probably need only 6000-7000 pips to doubble the account (compounding). It depends on how often the size is hiked and by how much. Using a modest leverage of 2:1 you need make half as many pips in order to double the account. When the leverage increases to still small 5:1, you probably need to clear 1200-1500 pips for your account to double.

    Mike.

  • Valutahandel
    12:23 am on March 27th, 2012 22

    Dear Fxmadness,
    I was wondering on a similar note, The greenback can go down since the Federal reserve beeing soft on the US ?
    I’ll be back to read more next time

  • Penny Stocks
    3:31 am on May 7th, 2013 23

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  • Tony Hammond
    3:12 am on May 28th, 2013 24

    The forex brokers like to offer huge leveridge, because they charge you interest on the money you have ‘borrowed’.
    You have 100:1 levered. You bet $1 per pip on the USD/YEN – you are ‘borrowing’ about $5000 on the USD/YEN.
    You have $5000 in your Account.

    You are being charged the currency interest + dealers fee to ‘borrow’ $5000, say 3% yet given a measly return on your $5000 of 1%. This 2% spread difference then goes to the dealer. For nothing.

    If you hold a position for any length of time, this can be quite a significant amount, >$100 per year for the dealer doing nothing – no risk and no real borrowing transaction. Obvoiusly, at 500:1 its $500 etc..

    Thats why being levered when you don’t have to is dumb.

 

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