Trading Without Leverage and Its Pros and Cons
BY Chris Andreou
|February 14, 2022Trading without leverage changes things. Leverage is an integral part of online forex trading and many beginners don’t fully understand it. It's important to know how it works and be aware of its pros and cons.
The fact is that one of the most important and appealing characteristics of forex trading is the high amounts of leverage offered by brokers.
In this article, we’re going to talk about the main advantages and disadvantages of trading without leverage in forex.
So without any further delay, let’s get started.
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Trading without leverage; The 3 pros and cons
Many newcomers are told to start off trading without leverage or use small amounts of leverage when trading. For most part, this means not buying assets or instruments that are of much greater value than what is in your trading account. Instead, to only use your own money or small amounts of leverage to fund your deals.
One of the biggest advantages that Forex gives to traders is the ability to trade with significant amounts of leverage. This can also be one of the biggest disadvantages too, because it can devastate your account quite quickly if used irresponsibly.
keep reading and I will explain what I mean.
What is trading with leverage?
Leverage in forex trading refers to the ability to control a large sum of capital using very little of your own funds. It allows you to buy assets of a much larger value than the amount in your trading account.
For example, if you have $1,000 worth of capital and use leverage of 1:100, you will be able to trade up to $100,000 worth of currency. In other words, you have the ability to leverage your funds up to 100 times more, in the marketplace, by depositing a small margin 100 times less.
The margin is usually expressed in percentage terms and it will depend on the leverage. If you have 1:100 leverage, you are only required to put up a 1% margin (1:100), as collateral against the $100,000. With some brokers, you have the ability to trade with higher amounts of leverage. In some jurisdictions, leverage is capped by the regulator to protect investors from the potential consequences of it.
Excessive leverage is one of the reasons why forex is risky. With that said, it can be very rewarding at the same time when the price moves in your favour.
Is it possible to trade without leverage?
Despite this feature offered by the broker and set on the trading platform, it is possible to trade without leverage. The purpose of leverage is just to allow you to trade with more money than you actually have.
So if you trade volumes or lot sizes worth the amount of money you actually have in your trading account, you are trading without leverage. For example, one micro lot or 0.01 lots is an equivalent amount to trade of $1,000. If you open 0.01 lots and maintain $1,000 in your account and don’t open any other trades, you will be trading without leverage.
Even though you are only required to put up a small margin as collateral to open this trade, you wouldn’t be buying assets of larger value than you have. It is only when you open the second deal that you would be leveraging your funds.
What are the pros of trading without leverage?
If you want to trade Forex but, you are worried about the risks, maybe you should consider trading without leverage. There are advantages to this and it is definitely worth considering.
Here are three reasons why you should consider trading without leverage.
It slows down losses
There is a high risk of losing money rapidly when trading in the forex market using leverage. The more leverage you use, the faster your potential losses can accrue. Leverage can work against you just as easily as it can work for you.
If you purchase assets using leverage and the price moves against you, your losses will be magnified by the same factor. Relative to a small account the losses can be quite significant.
It minimizes the impact of market volatility on your account
Leverage allows traders to gain more exposure in financial markets than what they are required to pay for. So trading with larger sums of money magnifies the value of the price movement.
A $1 devaluations in the asset being traded will be a $1 devaluation in equity when trading without leverage. However, when trading with leverage, that same $1 devaluation in the asset will be magnified in your equity by the amount of leverage used.
Margin calls or margin stop outs are less likely to occur
In trading, a margin call is what happens when the value of your account can no longer support the losses you have accrued. When the losses accrue and deplete your equity and margin, an account will get a “margin stop out”. Deals will automatically be closed by the platform to prevent further losses and the total loss of the account.
When trading without leverage, the chance of this happening decreases.
In summary, trading without leverage reduces the impact of adverse price movements on your account. Losses can accrue slower and the collateral to keep deals open can be more sufficient. Read this article to learn how to change the leverage setting on your account.
What are the cons of trading without leverage?
Trading without leverage requires a higher margin (i.e. deposit) to open and hold a position than is needed when trading with leverage. So if you want to open a deal of say, $100,000 on the EUR/USD, but your leverage is set at 1:30, you will not be able to open this deal with less than $3,333.33 in it.
Therefore, the first disadvantage is;
It requires larger amounts of capital to trade
If you don’t have sufficient margin in your account to open deals of the minimum lot size, then you won’t be able to open any deals. The minimum lot size on the MT4 and MT5 trading platforms in 0.01 lots. A small lot size such as this is an amount to trade of $1,000.
So you would need to deposit at least that amount of money to open one trade with the minimum volume.
It limits what you can trade
On the other hand, if you trade with 1:100 leverage and your broker requires a 1% margin for the same trade, you will only need $10 to open 0.01 lots. The remaining $990 from the previous example can be used to open more deals. Trading without leverage, offers less flexibility, as well as less opportunity to trade than trading with leverage.
It limits your profit potential
When you trade with leverage and buy assets of greater value, the movement in the price of the asset is magnified. For example, if you buy 0.1 lots and trade without leverage, and the currency pair moves up by 100 pips, then your profit will be $10.
Compared to trading with leverage, the profit will be the same but since you are required to put up a much smaller margin instead, the real return on investment is far greater.
In summary, trading with leverage can increase your potential to profit because you can buy more assets, open more deals and magnify the return on your real investment.
Conclusions about leverage
Financial instruments are volatile and complex in nature, and it usually takes some time for beginners to get used to trading them. The concept of trading using leverage and margin is also often misunderstood. Many traders start trading and ask for high amounts of leverage from their broker, without fully realizing how this can impact their investment.
Trading with leverage lets you trade greater sums of capital, allowing for larger lot sizes and substantial potential for profits. However, it also means that losses will be amplified as well. You should consider your level of experience, investment objectives and seek independent financial advice if necessary before trading with leverage.
By trading without leverage, you are taking on less risk relative to trading with leverage, but it’s important to note that you may not make as much money either. So why would anyone choose to trade without leverage?
There are three reasons, it slows down losses, minimizes the impact of price volatility on your account and you are less likely to get a margin stop out.
The question about whether you should trade with leverage or trade without leverage is really one about balance. You don’t want to limit your profit potential and restrict your opportunities to trade. But you also don’t want to increase the risk of losing your investment faster either.
For this reason, it is best to think of trading in terms of how much you are willing to risk on any particular trade idea. Make that a small percentage of your account, and then decide where the cut off point will be in case of adverse price movements. Then trade an appropriate lot size with manageable pip values. In this way, the risk of loss is predefined, known and acceptable beforehand. Thinking about the use of leverage in trading then becomes less relevant and more a function of your trading account.
Consider trading on a demo account and open deals of different lot sizes to see how price movements impact your profit or loss.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.
Experienced independent trader
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Trade responsibly: CFDs are complex instruments and come with a high risk of losing all your invested capital due to leverage.