Both of us sold our apartments in 2001 for $480,000 each. I made $240,000. My investment was $60,000; so my return on investment was 400% ($240,000/$60,000). My friend made $240,000 times 5 or $1,200,000. His investment was $60,000, so his return on investment was 2,000% ($1,200,000/$60,000).

Had we invested in foreign exchange instead of real estate it would have looked like this:

My initial deposit (investment) in 1988 was $60,000. I leveraged 4 to 1 and bought $240,000 worth of Euros. My friend's initial deposit (investment) was $60,000; he leveraged 20 to 1 and bought $1,200,000 worth of Euros. By 2001 the Euro doubled in price and we sold our positions. I made $240,000 on my $60,000 investment (400%). My friend made $1,200,000 on his $60,000 investment (2000%).

So why wouldn't an investor use the maximum leverage available? The answer is mark to mark and margin calls. The dollar value of your account is adjusted throughout the day to reflect the current market value of any open positions. Using the example above. Had the Euro initially declined 5% my friend would have received a margin call requiring additional monies or his Euro position would be closed out and his initial investment of $60,000 would be entirely lost. On the other hand, my Euro position was safe until the Euro declined 25%. Clearly, a 5% decline would not have put me in any danger, while potentially wiping out my friend.

Choosing the right amount of leverage that allows for maximum return on investment, while adequately protecting against getting wiped out is the key to realizing optimal returns.


Note:

Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures  Hanover, Paribas, European American. www.EurUsdTrader.com