Do you want to trade in the forex market but are not sure how much leverage to use? Can you trade forex without leverage? Leverage is essential in the forex market because the movements are tiny.
We have never seen traders who don’t use leverage in the forex market. This is because we would need a huge capital to get started.
You can trade forex without leverage. As with any other financial instrument, you can use leverage and, therefore, the margin or only the money you have in your account. Just make this choice when you open your account, most brokers allow you not to use leverage.
In this article, we will explain the advantages and disadvantages of using leverage in the forex market. We will also show you how to set up an account to trade forex without leverage.
That you can trade without leverage does not mean that it is helpful to do it. In this article, we will explain why.
From Investopedia: Forex Leverage: A Double-Edged Sword
Forex Trading without leverage: advantages and disadvantages
Many forex traders take it for granted that it is obligatory to use leverage when trading. Few reflect on the advantages and disadvantages of using a margin account.
Keep in mind that forex is characterized by low volatility. The currency market moves every day by a tiny percentage compared to, for example, most of the share stocks.
The reduced volatility of the forex market also reduces profits. It will, therefore, be necessary to use more capital to obtain the same returns.
These considerations are easy to make; we want to evaluate aspects that are generally not taken into consideration.
It is not possible to test this choice only based on the percentage of gain that can be obtained.
In deciding whether to use leverage, we must first analyze the practical and psychological aspects resulting from this choice.
In this article, we assume that you are using an MT4 platform and a classic forex broker.
“It’s very important that retail traders understand that leverage is a double edge sword. We can make a lot of money on the upside but also, we have to risk a lot.“Richard Jackson
Forex trading without the leverage: Advantages
You are free to use higher time frames
Daily time frames or higher are the easiest to trade. Many traders love to trade on intraday charts, but it is challenging and the competition is very high.
A daily or weekly timeframe, especially for currencies, could be the winning choice because we can follow more clear and longer trends.
Obviously, to operate in this way it is necessary to set huge stop losses. Almost all traders use very small accounts with very tight stop losses. For this reason, they are forced to operate only on low timeframes.
What is generally done by those who use the lever is to open very large positions with tiny stop losses. A novice trader shouldn’t be working this way as it is complicated.
Stay longer in position and less stressed.
Without leverage and with broader stop losses, we will have more margin of error when we get into position. We can correctly predict the direction of a trend, but we should not be right immediately.
Thanks to the wider stop-loss and the time frame used, we will have a much larger average trade.
The average trade is the average profit that we can get calculated on all the profits and losses of a period.
Having a high average trade is essential because it reduces the impact of commissions and spreads.
Easily calculate profitability of a strategy
Monetary management is also much simpler; capital is always the same. We will calculate the ROI (return on investment) and any other aspect of our operations easily.
Avoid technical errors from overexposure
Everyone has made a mistake when entering a trade. Have you ever entered the market with an entire Lot instead of a Micro-Lot? If you don’t have enough money in the account and you don’t have leverage, the broker will never let you open a monster position.
From International Organization of Securities Commissions: Report on Retail OTC Leveraged Products – Final Report
Forex trading with the leverage: Advantages
There are few advantages for a newbie trader in using an account with leverage.
The leverage amplifies any error and makes any trade more difficult, especially for a novice trader.
Keeping little money in your account may be the best thing to do when you trade, also to limit mental stress.
Do we want to talk about the boredom of using an account without leverage? Many traders would not have the patience to follow this kind of operativity.
However, some advantages are often not considered when using a leveraged account.
Let’s see what they are.
Safer: less money to be deposited on your account
By using a margin account, you can deposit a minimum amount into the account and leverage it.
Considering that we are often talking about not regulated brokers, keeping little money in the account is the winning choice.
Limit the technical risk
Are you a trader who uses automatic systems? Again, keeping little money in the account is the most prudent choice. Using a leveraged account puts you at greater risk if your expert advisor will create problems and you don’t know how to deal with them.
Limit the risk of mental tilt
Have you ever had a mental tilt and started opening operations only out of anger or frustration? Again, keeping a little money on your bill will save your life.
How to set up an account to trade forex without leverage
Let’s see how to set up an MT4 account without leverage. It is effortless when you are in the registration phase, almost all brokers let you choose the amount of leverage.
It is one of the first things you are asked for.
Typically, brokers provide these leverage from which you can choose:
- 1: 500
- 1: 400
- 1: 300
- 1: 200
- 1: 100
- 1: 1
Just select 1:1 and you will have your account without leverage.
An example of misuse of leverage
Jack finds a broker and opens his account to trade forex with a MetaTrader platform. He deposits 1,000, and he chooses a 1:100 leverage.
He is ready to open his first trade. He sells 0.01 lot of EURUSD. How much is 0.01 in money?
1 lot = 100,000
0.10 lot (mini lot) = 10,000
0.01 lot (micro lot) = 1,000
With an open trade of 1,000 with a 1,000 account, has Jack invested all his money? No.
As you can see, Jack has a free margin of 988.88. What’s happening? Jack “is borrowing” money from his broker to leverage his investments.
Jack needs to guarantee only the loss with his deposited money so he can open another trade.
He opens a Sell trade on EURUSD, this time, he sells 10,000.
Jack has a position of 11,000, but with the leverage on his 1,000, he still has $ 886,67 of free margin.
Jack is pleased. With only $ 1,000 he sells a relatively substantial position of $ 11,000, making him feel like he is a professional trader. He open another trade with 4 Microlot and closes the platform and goes to lunch.
At 2 p.m., news impacts the EURUSD that causes it to fall. With a $ 50,000 position size, every pip values $ 50; after only 200 pips Jack’s account is “blow up.” When Jack finishes his lunch, the broker closed his position in a margin call, signifying the end of Jack’s meteoric career as a Foreign Exchange or “ForEx” Trader.
The lesson here is: Choose position sizes given the amount of leverage you are granted for your account about the volatility associated with the pair or financial instrument that you are trading.
When you open an account with big leverage, scale the position sizes that you open appropriately, relative to the amount of capital you have in your account to hold the established position just in case it moves against you.
Remember, leverage works BOTH WAYS: It amplifies Gains and Losses. Size / Scale your Positions appropriately!