Can You Trade Forex Without Leverage?

Category: Trading Guides | Author: Trading Brokers | Date: January 5, 2023

For novice traders, the foreign exchange market is a well-liked and potentially profitable source of income when you know what you are doing. Leverage can, however, lead novices down an economic rabbit hole if they don’t know what kind or size ratio would work best with their chosen approach, so there’s no guarantee that you’ll be able to fully benefit from your winnings. However, it is possible to trade forex without using leverage. In this post, we will examine what leverage and no leverage trading are, their advantages and disadvantages, as well as strategies for trading on the Forex market without leverage.

What is leverage?

Investors that utilize leverage trading, commonly referred to as margin trading, borrow money from a broker or another party to trade assets. They can hold larger positions thanks to this sort of financing than their trading account balance would otherwise permit if they were to pay for the asset in full. Leveraged trading can increase both your gains and losses.

Leveraged trading has the advantage of offering you the possibility for significant rewards but also substantial losses. If a trader invests $1 and places orders for 100 shares at a leverage ratio of 1:100, they will benefit from an increased profit if the market moves in line with their expectations, but if something goes wrong, the losses could be greater than they would without leverage.

Example of leverage

Let’s look at a scenario where a trader has a deposit of $1,000 in their own forex account and compare it to trading forex without leverage. If the trader was using 1:100 leverage, they could open a position size of $100,000 because 1,000 multiplied by 100 is equal to 100,000. This means they can earn or loss a lot more than they would if they did not have any leverage. For instance, if they were trading without leverage, the max position size would be $1,000 instead. Whilst this would limit the loss, it would also restrict the profit potential of the trade.

Why is trading with leverage risky?

Forex traders can boost their potential gains and exposure by using leverage, which is a useful instrument when used correctly. It does, however, have some hazards. The most prominent of them are listed here.

  • Increased losses: Leveraged traders run the risk of losing more money than they have on hand. You will lose all of your money if, for instance, the value of your investment drops by 50% and the leverage ratio is 1:100.
  • A potential margin call risk: You essentially borrow money from your Forex broker to finance your trade when you use leverage. You will lose both the money you invested and the money you borrowed if the value of your investment declines. This could cause your account balance to disappear quickly and, in some situations, trigger margin calls from your broker.
  • Hard to control: Trades with high leverage can cause significant fluctuations in the value of your investment. These price fluctuations can be challenging to control and might lead you to act hastily and regret it afterwards.

Therefore, trading with high leverage brokers can be a very risky strategy, especially for new traders who do not have the background or education needed to execute effective margin trades.

Do I need leverage to trade forex?

No, you do not need to trade forex with leverage. But trading currencies without using leverage means the profit potential is limited. If you want to make any kind of money from this market, it will take more time, money, and experience. For this reason, too many beginner traders over leverage their accounts as they hope to get rich quick. More often than not, this leads to blown accounts and upset traders. It is no coincidence that a large majority of retail forex traders lose money and eventually give up.

A beginner trader with a $100 deposit must trade at a ratio of 1:100, which requires them to make an investment of $10,000 in order to realize the same profit as from the leveraged trade. Trading without leverage on the Forex market lowers your losses, which is its main advantage. You will only lose the money you invested, not any money you borrowed, if the value of your investment declines. Therefore, compared to trading on margin, this type of trading is far less dangerous.

Trading without leverage has the additional advantage of requiring you to exercise greater trading discipline. You won’t be as likely to take unnecessary risks when you can’t control significant positions. Over time, this may result in more steady profits.

But if you look at it from a different angle, you could earn $500–$1000 every month if you invested $10,000 and made a 5%–10% profit. You may have the same benefits from a regular employment without as many dangers of loss.

Institutional trading

Companies that invest money on behalf of sizable investment, pension, and insurance funds are known as institutional traders. Individual customers typically have significantly less purchasing power than institutional investors, who can purchase billions of shares of stock at once. They also frequently have more experience and a better understanding of risk management. They are the ones who typically trade currencies without the use of leverage.

Furthermore, institutional investors do not take less profit while trading without using leverage. On the other hand, they receive substantial returns. Institutional investors have an advantage over independent traders thanks to their direct access to the market and extensive analytical infrastructure. Due to the access they have without using leverage, such as through Forex brokers or other middlemen who take a cut of every trade made with an investor’s money as fees, interacting with these sorts directly allows them to maximize their profits.

Can CFDs be traded without using leverage?

Speculators can trade the underlying asset using CFDs, which are derivative contracts that let them trade without actually owning it. Similar to Forex, it is possible to trade CFDs without using leverage, but many brokers don’t typically allow it and don’t promote it. With the use of leverage, traders can take on larger positions than they could with their own trading capital, which increases both gains and losses.

Trading without leverage does have a restriction on potential earnings, but it also greatly lowers the possibility of suffering substantial losses. Due to this, some traders opt for CFD trading without leverage, especially those who are new to the market or who are dealing with risky assets. The choice to employ leverage or not is ultimately a personal one that should be based on the trader’s risk appetite and financial goals.

Pros and cons of leveraged forex trading

Trading forex with leverage has its advantages and disadvantages, just like anything else in life. Let’s examine a few of the more significant ones.

Pros of trading without leverage

  • Reduce your losses: Your potential losses when trading without leverage are capped at the balance of your account. This is so that in a trade, you can never lose more money than you invested. In contrast, your potential losses are increased when you trade using leverage. This is because you are borrowing money to engage in trading, and you will be compelled to repay the loan plus interest if the value of your investment declines.
  • Encourages more disciplined trading: Without using leverage, you are essentially trading with your own funds. As a result, traders are more cautious about the level of risk they take because they cannot afford to lose their entire investment.
  • A lower risk: Trading with leverage means both boosted gains and boosted losses. Trading without leverage reduces risk exposure and makes managing total exposure easier. Additionally, refraining from using leverage will assist you avoid making rash judgments that frequently result in significant financial losses.
  • Lower levels of stress: Your losses when trading without leverage will be capped at the amount of money you have at stake. Since you know that your losses will be limited, this can greatly lower your stress levels and keep your mental and emotional health in good shape.

Cons of trading without leverage

  • Costs more money to invest: Trading without leverage requires that traders deposit the entire position size.
  • Minimal profitability: You cannot make significant gains on the foreign exchange market without using leverage.
  • Low account purchasing power: Investors typically aren’t able to open more than one or two positions at once since they have to invest the entire position’s value to initiate the transaction. To diversify his portfolio, a trader needs have at least $10,000 available.

Conclusion: should I use leverage?

Trading with leverage and trading without leverage each have advantages and disadvantages. If utilized properly, leverage can be a useful instrument, but it can also magnify traders’ losses if the market behaves differently than they had anticipated. Contrarily, trading without leverage has far lower risks but also yields lesser earnings.

Choosing whether or not to use leverage Each trader must decide for themselves whether to engage in forex trading. Since it relies on personal trading preferences, risk tolerance, and capital availability, there is no right or wrong response. It seems sense to begin with a modest account and trade without leverage if you are new to forex trading until you get more experience. Additionally, practicing on a demo account is advised. You’ll be able to reduce your losses and develop superior risk management skills as a result. You can start to employ higher leverage as soon as you start to feel more assured in your trading skills. Just be sure to utilize it responsibly at all times.

Whether you choose to trade using leverage or not, it’s critical to understand the risks involved and make sure they are consistent with your trading style, strategy, and risk management plan. You improve your chances of having a successful trading experience by doing this.

If you want to learn more about leveraged trading, you can put it into practice by opening a free demo account with a forex broker. This will allow you to experiment trading forex with and without leverage to see which you prefer.


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