Forex trading without leverage, advantages and disadvantages
Trading forex with or without leverage is an important question every trader should answer before starting his or her investing life.
With over 5 trillion dollars in transactions per day, Forex trading is one of the most exciting ways of making money and even making a decent living for every investor.
At the top of it, traders can use leverage to multiply their options and their profits; however, it comes with risks, responsibilities, advantages, and of course, disadvantages. On the other hand, people can invest money in Forex and trade without leverage, but it comes with certain conditions in terms of available cash and tolerated risk.
In this article, we will talk about an investing tool that can be a magic brew for some, but a bitter poison for others. What is the leverage meaning in Forex, and what are its advantages and disadvantages. How a trader can manage it, and what is the best leverage level to use in Forex. Finally, let’s comment on reasons to trade without leverage.
Yet, let us talk about the essential things first. What Leverage is?
What is leverage
Leverage, also known as gearing, is an investing tool and technique which works as a multiplier of your investments and your potential gains and losses. Long story short, it expands the outcome of your work while increasing the impact of your resources.
According to Charles Schwab’s Guide to Margin, leverage is the use of debt as a supplement of investments. “Leveraging means using margin to potentially capture more returns than when investing on a cash-only basis.”
That being said, leverage is also commonly known as a double-edged sword, traders would be able to multiply their profits, but at the same time, it could increase their losses. The reason is that leverage entails the ability to control a large amount of money while using smaller levels of cash as brokers allow traders to invest as much as they can lose when trading Forex.
Traders use leverage in their accounts as a way to increase the potential of earnings and to grant themselves access to markets which they wouldn’t have the ability to trade due to their cash limitations.
How does leverage work
After answering what it is, let us talk about how does leverage works in Forex. Let’s say that you are investing in Forex with 1.000 dollars of your own. A typical lot in the FX market equals 100,000 currency units.
So, in the case that you want to go long EUR/USD for a lot, you would need to have 100,000 in your account if you don’t use leverage. On the other hand, with a leverage of 1:100, for example, you would be able to trade the lot with your account. Why? A 1:100 gearing will multiply your money 100 times.
Leverage is used in Forex as the price movements in pairs are represented in pips, the smallest change in currency value, which is usually a fraction of a cent.
Nick Lioudis highlights the concept of pips on the leverage framework in his article published by Investopedia. “This is why currency transactions must be carried out in sizable amounts, allowing these minute price movements to be translated into larger profits when magnified through the use of leverage.”
“When you deal with an amount such as $100,000, small changes in the price of the currency can result in significant profits or losses,” Lioudis explains.
In the same line, Wikipedia’s take on leverage and risk says that “the high level of leverage afforded to borrowers involved in forex trading presents relatively low risk per unit due to the relative stability of that market. Compared with other trading markets, forex traders must trade a much higher volume of units in order to make any considerable profit.”
Most common leverage levels
1:1 – No leverage. As for reference, the one to one is trading with no leverage or margin. You should use your money to go long or short. If you want to buy 50 euros or go long the Euro, you will need to have the equivalent amount in the other currency.
10:1 – With a ten to one leverage, for every $1 that you have in your account, you will be able to place a position up to $10. Therefore, if you have $1,000, then you can trade a $10,000 worth position.
50:1 – When you are trading with a 50:1 leverage, every dollar can be exchanged as $50. Then, the ability to open a lot is ready when you have $2,000 in your account.
100:1 – It is the typical leverage is most Forex platform. It says that every dollar represents a $100 of value. To trade a lot, you would need a $1,000 account.
200:1 – Risky two-hundred to one leverage pays 200 dollars per every single you have in your account. Traders with a $500 account will be able to trade a lot position.
400:1 – High leveraged accounts of 400:1 will allow you to trade $400 per the value of $1 in cash in your account. With a 1,000 dollar funding in your balance, you will be able to trade up to 4 lots.
What is the best leverage to use in forex
There is no perfect leverage level for everybody. It all depends on yourself, your economic situation, your needs, and your forex strategy. What works for one may not do it for you.
You would prefer high leverages in case you do like risk and high profits. Also, a trader would like low leveraged accounts if it doesn’t have a significant amount of cash but wants to be conservative in terms of risk.
In addition, some traders wouldn’t like margin or excessive risk for each pip, so they would prefer trading with no leverage at all. That would be the 1:1 rate. A dollar will equal for a dollar, and an euro will mean one euro.
Trading Forex without leverage
To trade without leverage is the same as buying and selling currencies with the 1:1 no-leverage rate mentioned before. It means that you will trade with your own money and no margin or leverage provided by the broker will be necessary.
Therefore, to trade one standard lot of EUR/USD without leverage, you would be required to have an account balance of $100,000. The same situation happens if you want to have a position of two or three lots, you should have enough funds of $200,000 or $300,000.
Accessibility is the major downside of trading Forex without leverage as no every average person has $100,000 in cash to fund their account and then trade with no leverage. However, not everything in Forex is about lots. Some brokers and platforms allow you to work with mini and micro accounts for a fraction of a lot.
A mini lot works with 10,000 units. That means that to trade a mini lot of GBP/USD without leverage would require you to have at least $10,000 in your account.
In the same line, micro lots, which work with 1,000 units, will require you to have at least $1,000 in funds in your account to trade a micro lot.
Can I trade Forex without leverage?
So, after the question about trading Forex without leverage, it comes to different options. You can undoubtedly purchase, sell, and make investments with no leverage at all, but you will need to afford the money in your account balance.
While trading in standard accounts with standard lots without leverage would require you to have at least 100,000 dollars as balance, micro and mini accounts will need a considerably smaller amount of money.
Mini and micro lots can indeed provide you with the opportunity to trade without leverage with less money. However, another question arises here: It is a good idea to trade with no leverage in your account? Let’s see.
Advantages of Forex trading without leverage
Since you are not borrowing any funds in terms of margin or leverage, you are not entitled to pay daily costs, interests, or hidden fees to your broker. You will get all of your profits, and no interest payments will cut in your return.
In the case you win a 1% in a EUR/USD position, your account will be credited with that 1% and no interest cost will be charged. Long story short, all profits go to the bottom line.
This topic is vital when you have a significant amount of money ready to invest. You can trade more at a minimum price.
Less risk of a margin call
When you trade without leverage, you are using your money for good and bad. But the deal is that you are not in peril of wiping up your account in a market event due to over-leveraging or over-borrowing.
Remember that while using leverage, every loss is multiplied. With a 100:1 leverage, a 50 pips loss that drives the EUR/USD from 1.1000 to 1.0950 would mean a 50 dollar decline in your account.
You trade what you have in a more structured way of trading
Nothing more and nothing less. You trade what you have in your pocket. In that way, you will have more control of your finances and prepare yourself for what you can afford.
It will also provide you with control of steady bottom-line numbers and long term conception of your investments.
As you are trading without leverage, your positions will be better prepared for long term frameworks.
Disadvantages of a no-leverage Forex trading
Cost and investments in term of cash
The most crucial downside of trading without leverage is the amount of money do you need to do it and, at the same time, to make decent gains.
As Wikipedia highlights, “forex traders must trade a much higher volume of units in order to make any considerable profit.” As traders make money from the price movements and pips measure those movements, investors should decide how much would be his bet for every pip.
Reduced potential gains in trades
As you are not using the multiplier of the position, your potential gains would be reduced to the nominal percentage of the price difference between the opening and closing prices.
Let’s say that you invest 1,000 in a long EUR/USD position. Then the euro goes from 1.1000 to 1.1100 against the dollar. So far, your gains would be just 1% to $1,010. On the other hand, if you are 100:1 leveraged in a 1,000 investment, your profits would have been $100 to $1,100.
Reduced average monthly return
It is said that successful Forex traders who use leverage average around 5-10% in monthly returns. Indeed, these numbers are significant figures when talking about profits. However, it already includes marginal trading. Without leverage, the returns levels collapsed as the exposure is also reduced.
Forex traders who don’t use leverage, the monthly return would average around 0.3% to 0.5%. Not too much money if you trade with a 1,000 or even a 10,000 dollar account.
Should I trade Forex without leverage
The million dollar question. Unfortunately, there is no conclusive answer. It all depends on different matters such as your financial and personal situation, how much you can afford to lose, how well do you manage your psychology, your trading strategy, and of course, how much you are willing to invest.
Traders with a significant amount of money would find trading without leverage more attractive than those who don’t have too much cash and need some steroids to make their money work.
Long story short, forex trading without leverage has a notable disadvantage, which is the size of your weapon. One the other hand, no leverage would mean fewer costs and fair and clean profits.
Leverage is not bad for trading. Actually, it is considered an excellent way to make money for you, and at certain levels, it is also a tool to manage risk while trading significant positions.
Of course, your risks would be higher, but as Kimberly Amadeo wrote in an article published at The Balance, “most traders use strict stop-loss orders to sell the trade if the exchange rate goes against them.”
My name is Phat Fin Ge, but most people just call me Fat Finger or Mr. Finger.
Many years ago, I was a trader on the Hong Kong Stock Exchange. I became so successful that my company moved me to their offices on Wall Street. The bull market was strong, but my trading gains always outperformed market averages, until that fateful day.
On October 28th, 1929, I tried to take some profits after Charles Whitney had propped up the prices of US Steel. I was trying to sell 10,000 shares, but my fat finger pressed an extra key twice. My sell order ended up being for 1,290,000 shares. Before I could tell anyone it was an error, everyone panicked and the whole market starting heading down. The next day was the biggest stock market crash ever. In early 1930, I was banned from trading for 85 years.
I went back to Hong Kong to work at my family's goldfish store. Please come and visit us at Phat Goldfish in Kowloon, only a 3 minute walk from the C2 MTR entrance.
I thought everyone would forget about me and planned to quietly return to trading in 2015. To my horror, any error in quantity or price which cause a problem kept getting blamed on Fat Finger, even when it was a mix up and not an extra key being pressed. For example, an error by a seller on the Tokyo Stock Exchange was to sell 610,000 shares at ¥6 instead of 6 shares at ¥610,000. That had nothing to do with me or with how fat the trader's finger was, but everyone kept yelling, "Fat Finger! Fat Finger!" In 2016, people blamed a fat finger for a 6% drop in the GBP. It really was a combination of many things, none to do with me or anyone else who had a wider than average finger.
Now that I can trade again, I'm finding forex more interesting than stocks. I've been doing some research on trading forex and other instruments and I'll be sharing it here.
If you see any typing errors, you can blame those on my fat finmgert. If you see any strange changes in price, it's not my fault.
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