Are Forex traders forced to use leverage?
"While it's not true that you have to use leverage to participate in Forex, the alternative makes it impractical for most people to be able to do so.  You need to be able to put a lot of money into it in order to not trade on leverage. The fact is, most accounts for ""normal"" people require leverage because the size of the typical contract is more than the average person can afford to risk (or usually more than the average person has). Leverage, however, in the Forex market is not like Leverage in the stock or commodities market (well, they're the same thing in theory, but they are executed differently).  In Forex, the broker is the one lending you the money in nearly all cases, and they will cash out your position when your account balance is exhausted.  Thus, there is no risk for them (barring fraud or other illegal issues).  Technically, I don't believe they guarantee that you will not accrue a debt, but I've never heard of anyone having their position cashed out and then owed more money.  They've very good about making sure you can only spend money you've deposited. To put this another way, if you have $1,000 in your account and you are leveraged to 100,000.  Once your trade drops to $1000 in losses your position is automatically cashed out.  There is no risk to the broker, and no risk to you (other than your $1000)... So trading without leverage has little value, while traiding with leverage has lots of potential gain and no downsides (other than a faster rate of loss, but if you're worried about that, just trade smaller lots.)" "No one is FORCED to use leverage. But most people do. Trading companies like it because, the more leverage, the more ""business"" (and total commissions). If someone starts with $1 million and leverages it up ten times to ten million, companies would rather do ten million of business than one. That's a given. On the other hand, if you're Warren Buffett or Bill Gates, and you say I want to do $1 billion of FX, no leverage, no trading company is going to turn it down.  More often, it's a company like IBM or Exxon Mobil that wants to do FX, no leverage, because they just earned, say $1 billion Euros. Individuals USUALLY want to use more leverage in order to earn (or lose) more with their capital." It isn't that the companies force traders, it is more the other way around. Traders wouldn't trade without margin. The main reason is liquidity and taking advantage of minor changes in the forex quotes. It goes down to pips and traders make profit(loss) on movement of pips maybe by 1 or 2 and in some cases in 1/1000 or less of a pip. So you need to put in a large amount to make a profit when the quotes move up or down. Supposedly if they have put in all the amount upfront, their trading options are limited. And the liquidity in the market goes out of the window. The banks and traders cannot make a profit with the limited amount of money available at their disposal. So what they would do is borrow from somebody else, so why not the broker itself in this case maybe the forex company, and execute the trades. So it helps everybody. Forex companies make their profit from the fees, more the trades done, more the fees and hence more profit. Traders get to put their fingers in many pies and so their chances of making profits increases. So everybody is happy. Actually, most of the forex traders do not prefer the practice of leveraging. In forex trading, a contract signed by a common trader is way more than any common man can afford to risk. It is not a compulsion for the traders to use leveraging yet most of the traders practice it. The other side of it is completely different. Trading companies or brokers specifically like it because you turn into a kind of cash cow when your account gets exhausted. As for trader, most of them don’t practice leveraging. I recommended Currency Trading For Dummies, in my answer to Layman's guide to getting started with Forex (foreign exchange trading)? The nature of the contract size points toward only putting up a fraction of the value.  The Euro FX contract size is 125,000 Euro. If you wish to send the broker US$125K+ to trade this contract, go ahead. Most people trade it with a few thousand dollars.
This was all luck, that amount of leverage will destroy your account in a single bad trade. You profit is way less than it should be because you are getting killed on fees.  Take a look at the bitcoin trade, you should have 2,157.30 in profit but you only have 1825.42. And your currency trades were consistently positions that were worth $400,000 dollars, where you were pulling out ~$50 in profits, even though they should have been ~$80 profits. You are consistently getting 30% less than you should be, and consistently betting waaaaay bigger amounts than you account can really handle. Bad trades will probably have 30% greater losses than actual, and when the market moves the wrong direction then a single position will wipe out your account. Yes, you could have just bought bitcoin and gotten great profits. You totally nailed the directions of the markets! It is just a matter of time before you blow up, the trailing profits won't always help you when the market starts going down first. Its the relative leverage available to retail traders between the two.  In the US one can trade equities with 2:1 leverage while with commodities the leverage can go much higher.  Combine this with the highly volatile nature of commodities, and it makes losing BIG too easy for the average trader. "When trading Forex each currency is traded relative to another. So when shorting a currency you must go long another currency vs the currency you are shorting, it seems a little odd and can be a bit confusing, but here is the explanation that Wikipedia provides: An example of this is as follows: Let us say a trader wants to trade   with the US dollar and the Indian rupee currencies. Assume that the   current market rate is USD 1 to Rs.50 and the trader borrows Rs.100.   With this, he buys USD 2. If the next day, the conversion rate becomes   USD 1 to Rs.51, then the trader sells his USD 2 and gets Rs.102. He   returns Rs.100 and keeps the Rs.2 profit (minus fees). So in this example the trader is shorting the rupee vs the dollar. Does this article add up all other currency crosses to get the 'net' figure? So they don't care what it is depreciating against? This data is called the Commitment of Traders (COT) which is issued by the Commodity Futures Trading Commission (CFTC)  In the WSJ article it is actually referring to Forex Futures. In an another article from CountingPips it explains a bit clearer as to how a news organization comes up with these type of numbers. according to the CFTC COT data and calculations by Reuters which calculates the dollar positions against the euro, British pound, Japanese yen, Australian dollar, Canadian dollar and the Swiss franc. So this article is not talking about futures but it does tell us they got data from the COT and in addition Reuters added additional calculations from adding up ""X"" currency positions. No subscription needed: Speculators Pile Up Largest Net Dollar Long Position Since June 2010 - CFTC Here is some additional reading on the topic if you're interested: CFTC Commitment of the Traders Data – COT Report FOREX : What Is It And How Does It Work? Futures vs. Forex Options Forex - Wiki" I wouldn't use it to take leverage unless you don't mind loosing your entire investment (this is a possibility as shares are already quite volatile). However, you don't have to take leverage and still trade CFDs. Benefits of doing so: Disadvantages: To answer your original question: There is proof out there. Here is a paper from the Federal Reserve Bank of St. Louis that might be worth a read.  It has a lot of references to other publications that might help answer your question(s) about TA.  You can probably read the whole article then research some of the other ones listed there to come up with a conclusion.  Below are some excerpts:  Abstract: This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency.  “Technicians” view their craft, the study of price patterns, as exploiting traders’ psychological regularities.  The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1970s and 80s before those returns were extinguished.  More recently, more complex and less studied rules have produced    more modest returns for a similar length of time.  Conventional explanations that rely on risk adjustment and/or central bank intervention do not plausibly justify the observed excess returns from following simple technical trading rules.  Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.    and  The widespread use of technical analysis in foreign exchange (and   other) markets is puzzling because it implies  that either traders are   irrationally making decisions on useless information or that past   prices contain useful  information for trading.  The latter   possibility would contradict the “efficient markets hypothesis,”   which holds that  no trading strategy should be able to generate   unusual profits on publicly available information—such as past    prices—except by bearing unusual risk. And the observed  level of   risk-adjusted profitability measures market  (in)efficiency. Therefore   much research effort has been directed toward determining whether   technical analysis is  indeed profitable or not. One of the earliest   studies, by Fama and Blume (1966), found no evidence that a particular   class of TTRs could earn abnormal profits in the stock market.   However, more recent research by Brock,  Lakonishok and LeBaron (1992)   and Sullivan, Timmermann an d White (1999) has provided contrary   evidence. And  many studies of the foreign exchange market have found   evidence that TTRs can generate persistent profits (Poole  6  (1967),   Dooley and Shafer (1984), Sweeney (1986), Levich and Thomas (1993),   Neely, Weller and Dittmar (1997),  Gençay (1999), Lee, Gleason and   Mathur (2001) and Martin (2001)). "I would say that you should keep in mind one simple idea.  Leverage was the principal reason for the 2008 financial meltdown.  For a great explanation on this, I would HIGHLY recommend Michael Lewis' book, ""The Big Short,"" which does an excellent job in spelling out the case against being highly leveraged. As Dale M. pointed out, losses are greatly magnified by your degree of leverage. That being said, there's nothing wrong with being highly leveraged as a short-term strategy, and I want to emphasize the ""short-term"" part.  If, for instance, an opportunity arises where you aren't presently liquid enough to cover then you could use leverage to at least stay in the game until your cash situation improves enough to de-leverage the investment.  This can be a common strategy in equities, where you simply substitute the term ""leverage"" for the term ""margin"".  Margin positions can be scary, because a rapid downturn in the market can cause margin calls that you're unable to cover, and that's disastrous. Interestingly, it was the 2008 financial crisis which lead to the undoing of Bernie Madoff.  Many of his clients were highly leveraged in the markets, and when everything began to unravel, they turned to him to cash out what they thought they had with him to cover their margin calls, only to then discover there was no money.  Not being able to meet the redemptions of his clients forced Madoff to come clean about his scheme, and the rest is history. The banks themselves were over-leveraged, sometimes at a rate of 50-1, and any little hiccup in the payment stream from borrowers caused massive losses in the portfolios which were magnified by this leveraging.  This is why you should view leverage with great caution.  It is very, very tempting, but also fraught with extreme peril if you don't know what you're getting into or don't have the wherewithal to manage it if anything should go wrong. In real estate, I could use the leverage of my present cash reserves to buy a bigger property with the intent of de-leveraging once something else I have on the market sells.  But that's only a wise play if I am certain I can unwind the leveraged position reasonably soon. Seriously, know what you're doing before you try anything like this!  Too many people have been shipwrecked by not understanding the pitfalls of leverage, simply because they're too enamored by the profits they think they can make.  Be careful, my friend." Don't like HFT? Use a stock exchange or dealer network that only allows manually entered trades.  I hope readers are not convinced by this article to support the enactment of regulations that prevent people from using HFT.  Maybe he's right and HFT is detrimental (which I doubt), but this is something that should be decided by the free market. "If you don't use leverage you can't lose more than you invested because you ""play"" with your own money. But even with leverage when you reach a certain limit (maintenance margin) you will receive a margin call from your broker to add more funds to your account. If you don't comply with this (meaning you don't add funds) the broker will liquidate some of the assets (in this case the currency) and it will restore the balance of the account to meet with his/her maintenance margin. At least, this is valid for assets like stocks and derivatives. Hope it helps! Edit: I should mention that" "It looks like these types of companies have to disclose the health of their accounts to CFTC (Commodity Futures Trading Commission). That is the gist I get at least from this article about the traders that lost money due to the Swiss removing the franc’s cap against the euro. The article says about the U.S. retail FOREX brokerage: Most of FXCM’s retail clients lost money in 2014, according to the company’s disclosures mandated by the CFTC. The percentage of losing accounts climbed from 67 percent in the first and second quarters to 68 percent in the third quarter and 70 percent in the fourth quarter. Side note: The Swiss National Bank abandoned the cap on the currency's value against the euro in mid-January 2015. But above paragraph provides data on FXCM’s retail clients in 2014. It could consequently be concluded that, even without ""freak events"" (such as Switzerland removing the franc cap), it is more likely for an investor to NOT make a profit on the FOREX market. This is also in line with what ""sdfasdf"" and ""Dario Fumagalli"" say in their answers." Simply because forex brokers earn money from the spread that they offer you. Spread is the difference between buyers and sellers. If the buy price is at 1.1000 and the sell price is at 1.1002 then the spread is 2 pips. Now think that this broker is getting spread from its liquidity cheaper (for example 1 pip spread). As you can understand this broker makes a profit of 1 pip for each trade you place... Now multiply 1 pip X huge volume, and then you will understand why most forex brokers don't charge commissions. "I think to some extent you may be confusing the terms margin and leverage. From Investopedia Two concepts that are important to traders are margin and leverage. Margin is a loan extended by your broker that allows you to leverage the funds and securities in your account to enter larger trades. In order to use margin, you must open and be approved for a margin account. The loan is collateralized by the securities and cash in your margin account. The borrowed money doesn't come free, however; it has to be paid back with interest. If you are a day trader or scalper this may not be a concern; but if you are a swing trader, you can expect to pay between 5 and 10% interest on the borrowed money, or margin. Going hand-in-hand with margin is leverage; you use margin to create leverage. Leverage is the increased buying power that is available to margin account holders.  Essentially, leverage allows you to pay less than full price for a trade, giving you the ability to enter larger positions than would be possible with your account funds alone. Leverage is expressed as a ratio. A 2:1 leverage, for example, means that you would be able to hold a position that is twice the value of your trading account. If you had $25,000 in your trading account with 2:1 leverage, you would be able to purchase $50,000 worth of stock. Margin refers to essentially buying with borrowed money.  This must be paid back, with interest.  You also may have a ""margin call"" forcing you to liquidate assets if you go beyond your margin limits. Leverage can be achieved in a number of ways when investing, one of which is investing with a margin account." What you are asking about is called Interest Rate Parity. Or for a longer explanation the article Interest Rate Parity at Wikipedia.  If the US has a rate of say zero, and the rate in Elbonia is 10%, one believes that in a year the exchange rate will be shifted by 10%, i.e. it will take 1.1 unit of their currency to get the dollars one unit did prior.  Else, you'd always profit from such FOREX trades.  (Disclaimer - I am not claiming this to be true or false, just offering one theory that explains the rate difference effect on future exchange rates. How should we disregard leverage when it's the leverage that creates the 'wipe-out' potential? If you simply convert 100K EUR to USDollars, you dollars might then fluctuate a few thousand, maybe even 10K over a year, but the guy that only put up 1000 EUR to do this has a disproportionally higher risk. "This advanced forex trading course allows forex traders to tracking intra-day banking activity in the forex market. Learn to trade forex using the trading secrets of the mega banks. These forex trading strategies will allow struggling retail traders to follow the ""footprint in the sand"" left by the mega banks, rather than getting ran over by them like most day traders." Stick with stocks, if you are not well versed in forex you will get fleeced or in over your head quickly.  The leverage can be too much for the uninitiated.  That said, do what you want, you can make money in forex, it's just more common for people to not do so well.  In a related story, My friend (let's call him Mike Tyson) can knock people out pretty easy.  In fact it's so easy he says all you have to do is punch people in the face and they'll give you millions of dollars.  Since we are such good friends and he cares so much about my financial well-being, he's gotten me a boxing match with Evander Holyfield, (who I've been reading about for years).  I guess all I have to do is throw the right punches and then I'll have millions to invest in the stock market.  Seems pretty easy, right ?