Introduction

Forex Trading and leverage are almost synonymous. However, is it possible to trade Forex without using leverage, and should you consider it? Most Forex traders may not have considered this as a viable option to trade the Forex market.

In this article, we answer the question: Can you trade Forex without using leverage, and should you consider doing it?

Furthermore, we will define precisely what leverage is in Forex Trading, discuss the Pros and Cons of Trading Forex with and without leverage, and why a Forex Trader may want to consider this approach.

Understanding Leverage in Forex Trading

So, what exactly is leverage, and why is it so popular in Forex Trading?

Leverage is essentially a tool that enables Forex traders to trade the Forex market with significantly more capital than they have available in their trading accounts.

This is done by borrowing money from the broker to control a much larger position than they would otherwise have been able to.

Leverage is always expressed as a ratio, such as 50:1, 100:1, or 200:1

Using an example of 100:1 leverage, traders would be able to control $100 for every $1 they have in their account.

For example, a trader with $100 of their own capital would be able to control a $10,000 position.

Likewise, a trader with $1,000 of their own capital would be able to control a $100,000 position.

However, although the money is loaned from the Forex broker, it is not actually deposited into the Forex Trading account.

Instead, the profit/loss is calculated at the end of the trade, and the trading account is either debited or credited to the trading account accordingly.

Trading Forex Without Leverage

Now that we understand what leverage is in Forex Trading and how it works, Is it possible to trade Forex without leverage?

The short answer is Yes, it is possible to trade Forex without using leverage.

In the context of Forex trading, what does without leverage mean?

Trading without leverage is also referred to as 1:1 leverage, which means you only trade using the available capital in your trading account.

For example, if you have $1,000 of your own capital, you would only trade using that $1,000 and be able to control a $1,000 position.

Using a hypothetical example of trading with 100:1 leverage and without leverage, we see that the profit and loss potential are substantially different.

Let’s say a trader using $1,000 of trading capital with no leverage is trading a currency pair that moves 1% in their favor; their profit would be $10 – 1% of $1,000.

Likewise, if the currency pair moves 1% against them, their loss would only be $10.

However, if the trader uses 100:1 leverage, they can control a $100,000 position with the same $1,000 of capital.

If the trade moves in their favor, they would make a profit of $1,000. However, if the trade moves against them, they would lose $1,000.

So, leverage can be a double-edged sword that amplifies your profit or increases your losses.

Pros and Cons of Trading Forex With and Without Leverage

What are the pros and cons of trading Forex with and without leverage?

Trading With Leverage

Pros:

• Increased Potential Returns

Using leverage increases the possible profit Forex traders can make in the market. For example, a 2% return on $50,000 is $1,000, while a 2% return on $1,000 is only $20.

It’s simple maths – the more money you invest or trade, the greater your potential reward.

• Greater Capital Efficiency

Using leverage makes Forex trading much more accessible to retail traders.

Using leverage of 100:1 makes it possible to trade an amount of $100,000, as traders would only need $1,000 of their own capital.

Conversely, without leverage, very few retail traders would be able to afford to trade $100,000.

• Better Opportunities for Diversification

Because leverage offers greater capital efficiency, Forex traders can spread their risk over several currency pairs.

A Forex trader using 100:1 leverage and $1,000 of their own capital can trade ten different currency pairs using $10,000, which provides good diversification.

Cons:

• Increased Exposure to Risk

With leverage comes not only increased profit potential, but also increased exposure to risk.

When a trade moves in your favor, you stand to make amplified returns. However, when a trade moves against you, you lose a larger percentage of your trading capital.

• Emotional Pressure and Stress

Arguably, the biggest challenge of Forex traders is controlling their emotions. Therefore, one of the biggest cons of using leverage is the emotional pressure and stress of amplified returns or losses.

Many people struggle to manage their emotions when trading; hence, the emotional pressure and stress tend to work against many traders – rather than for them.

• The Temptation to Overtrade

Another negative to trading Forex with leverage is the overwhelming temptation to overtrade.

Because they have access to a much more substantial amount of trading capital, traders tend to use what is available to them.

This can result in traders entering trades they should not and accumulating excessive losses.

Trading Without Leverage

Pros:

• Less Stress and Mental Pressure

Although leverage increases the profit potential, it also amplifies the potential losses.

A golden rule in trading and investing is to focus on not losing money as the main priority and making money as a secondary priority.

• No Interest Costs

Leveraged positions can incur additional costs. Trading without leverage enables traders to avoid any fees associated with borrowing money from their brokers.

• No Risk of a Margin Call

A margin call occurs when a trader fails to maintain the minimum capital balance required in their trading account for a leveraged position to remain open.

A margin call can result in a broker liquidating a position at a loss to cover the margin requirement.

Cons:

• Higher Capital Requirement

Trading the Forex market without leverage makes it a lot more challenging to make a meaningful return on capital.

A 1% return on $1,000 is only $10. This illustrates that a substantial financial outlay is needed to see meaningful returns of at least a few hundred dollars per trade.

• Lower Potential Returns

Due to the limited amount of capital being used, the returns are diminished compared to using leverage. A 1% return on capital with 1:1 leverage and 100:1 leverage are vastly different.

• Slower Account Growth

Higher capital requirements and lower potential returns ultimately result in slower account growth.

This is not suited for those looking to accelerate their account growth, build a reliable second income stream, or replace their full-time job.

When To Consider Trading Forex Without Leverage

Having considered the feasibility of trading Forex without leverage, as well as the pros and cons of it, should someone consider trading Forex without leverage? If so, under what circumstances?

The biggest pro to trading Forex without leverage is the decreased mental pressure and stress of increased capital exposure and the prospect of a margin call.

However, there are ways and means to mitigate risk when using leverage. Additionally, demo trading allows Forex traders to practice their strategy before deploying real money into the Forex market.

Having said that, a trader should consider trading without leverage when they are still learning to trade, have not yet developed their own trading strategy, and are content with growing their account slowly.

Conclusion

In summary, Forex trading without leverage has its benefits. However, Forex trading with leverage offers greater potential for reward, and many of the risks can be mitigated with good risk management.

However, if you only feel comfortable trading without leverage – at least for now, don’t let that deter you from learning and developing yourself as a Forex Trader.