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.
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.