Who Can Benefit from Trading Forex Without Leverage?

07/09/2020

The Leverage in Forex is a loan that is provided to a trader by the broker, which manages his or her trading account. The actual size of leverage can vary from as low as 1:2 to 1:500 or even higher. This essentially allows market participants to magnify their potential winnings and consequently earn higher payouts.
 
Despite some of its benefits, there are some traders and investors who do not use leverage and prefer to trade and invest with only their own cash. Since Forex is one of the most leveraged financial markets, for many market participants this approach makes very little sense.
 
However, if we analyze some of the characteristics of this method, trading Forex without leverage might work well for at least 3 groups of individuals.
 
Firstly, there are some traders and investors who trade with large trading account balances, for example, $100,000 or higher. Some of those individuals might not be comfortable with risking such large amounts with high leveraged trades. Therefore they might prefer to trade Forex without leverage so that they can trade with much less risk. This essentially lets those traders absorb the losses without losing their entire trading account.
 
There are also some people who are not aiming to earn a living in Forex. Instead in the environment of near-zero interest rates, they want to get a higher return on their savings without taking very serious risks. So earning 1% of the trading account per month might not be that impressive for some professional traders, however, for those looking to turn their trading account into a high-yielding Deposit, 12% per year can be quite reasonable.
 
Finally, there are some traders who are looking to enrich their market experience and master the use of Forex strategies in a real money trading environment, without risking to lose their entire deposit.

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Trading With and Without Leverage

Many experienced professional traders, as well as financial commentators, describe leverage as a ‘double-edged sword’. The reason behind this is that the leverage essentially has two sides of the same coin: It gives a trader an opportunity to trade with large amounts of money with smaller deposits and potentially earn high returns. However, on the other hand, just like it increases potential payouts, it can also magnify losses and even in some cases wipe out the entire trading account.
 
To illustrate this in more detail, let us take a look at this table:
Trading Forex without leverage
We can make several observations from this table:

  • Such small daily changes in the exchange rates as 0.2% can have a massive impact on high leveraged trades, but with those accounts which have no or very low leverage, there is very little noticeable difference.
 
  • Even if a trader uses 50:1, such degree of fluctuation can lead to a 10% loss of the amount invested, if the market moves in the other direction.
 
  • With 500:1 leverage there is a risk that the entire trading account funds can be wiped out.
 
It might be also useful to point out that the 0.2% change in currency exchange rates can happen in a matter of minutes. During the major economic announcements or other important events, market volatility can be even higher.
 
Therefore, for those traders who can afford and are willing to hold large balances on their trading accounts, for example, $100,000 or $300,000, the risk of losing a large portion of their funds in a short time frame might not be that appealing.
 
Consequently, some of those types of traders might decide to reduce their exposure by doing their FX trading without leverage. Even if there is a serious fluctuation in the Forex and a given currency pair moves in the opposite direction of the trader's position by 2%, it will only be 2% loss and the individual can afford to be patient and wait for reversal, or alternatively close the trade without suffering heavy losses.
 
Considering that they already have a significant amount of trading capital, it is perfectly possible to earn decent payouts without borrowing any funds from a broker.


Alternative High-Yielding Savings Account

Obviously not everyone can afford to put such large amounts of capital in the trading accounts. Even some of them who can, they might prefer to invest some of it in the Real Estate, Stock market, or other investments.
 
At the same time, the interest rates across the developed countries are at or very close to zero percent. So there might be many people who do not have the time or desire to trade Forex for a living, but they just want to earn a higher return on their savings, than on 0.1% or even 1% on their deposits.
 
Even if a trader manages to achieve a 0.75% return per month, that is a solid 9% return per year, far better than any savings account. On the other hand, they might not want to take too much risk with their hard-earned money, so no leverage trading for Forex traders can be one solution to this problem. Obviously, nobody can give a 100% guarantee of success, however, this can be significantly less risky than using 1:10 or 1:50 leverage.
 
To illustrate this, let us take a look at this NZD/JPY daily chart:
No leverage trading for Forex traders

As we can see from the above, during the last few months the New Zealand dollar/Japanese Yen pair is engaged in a long term downward trend. However, the price action itself does not resemble a straight line. There were at least 3 bounces before the trend resumed. So let us suppose that some traders who were using a no-leverage Forex trading method have decided to analyze the latest NZD/JPY charts and trade this pair at some point.
 
Suppose that they have decided to open a short NZD/JPY position at 72 level. As we can see after reaching this point, the pair had a short-lived recovery, when it reached the 76 mark. This represents approximately 5.6% appreciation of the New Zealand dollar. Now, even if traders used relatively modest 1:20 leverage, depending on available funds in some cases their entire position could have been wiped out or at least suffered significant losses.
 
However, since they are using a no-leverage trading method in Forex, this change would have only led to a 5.6% loss, but the point here is that traders are not forced to close down their positions. By judging the situation, they can either cut their losses or wait for a reversal.
 
So if they have chosen a second option and held this position until now, then they could close this trade at near 64 level, earning a payout worth more than 11% of the sum invested in this position.
 
This obviously does not imply that the no-leverage trading in Forex will always guarantee to win trades, however, it can certainly give more flexibility and breathing space to traders.


Affordable Forex Training

There are also plenty of beginner traders who want to sharpen their trading skills and get more experience, without risking to lose significant amounts. Clearly, there are many demo accounts available and for some people, this can help them to achieve those goals. 
 
Yet, still for many market participants, the experience gained by trading with real money is much more valuable. This requires coping with stress, a high degree of discipline, and attention. Something which is completely missing from demo accounts, where a trader can make some of the worst mistakes without any consequence and even reset the virtual money balance as much as he or she wants it.
 
This is a situation where no-leverage trading might be beneficial for Forex traders. For example, after training on demo accounts, a beginner can take the second step and open a trading account with a $1,000 deposit and set a leverage level at 1:1. Obviously the potential payouts here can be small, but this is not the most important point here. The main aim is to gather experience without heavy losses, even if most trades go wrong. This method essentially lets the trader survive the market volatility.
 
In order to get a better sense of this argument, let us take a look at this GBP/JPY daily chart:
No leverage FX trading

As we can see from the above GBP/JPY pair has been very volatile lately. Such fluctuations can create many good trading opportunities. However, unlike in the previous example, where the market participants guess the direction of a trend correctly, now let us suppose that the conclusions have eventually been proven wrong.
 
The story goes like this: after analyzing the charts in January 2020, traders have concluded that after a long downtrend, the GBP/JPY had a reversal in August 2019 and now entered the uptrend. Therefore let us suppose that they have opened long GBP/JPY at 142 level, without using leverage. We can all see from this chart what happened next: the Pound fell dramatically to near the 126 mark and later recovered some of its losses, eventually settling to near the 133 level.
 
So if traders decide to cut their losses and close this position, they will lose approximately 6.4% of the amount invested in this trade. Now, this might not sound a very successful outcome, however, it is much better than losing 100% of the funds in case of 1:20, 1:50, or 1:100 leverage.
 
As we can see from this example, by using this strategy, a trader can protect his or her accounts from massive losses and at the same time gather more experience.
 

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Trading Forex Without Leverage - Key Takeaways

Forex trading no leverage

  • Forex is one of the most highly leveraged markets. For the majority of traders, this is essential since this lets them earn high payouts with smaller deposits and without the major changes in the exchange rates.
  • Despite its popularity, there are a number of traders who might prefer not to use leverage in Forex. This category includes people with large trading accounts, part-time traders who are simply looking for a better return on savings, and those market participants who are aiming to gather real-time trading experience without taking much risk.
  • No leverage trading in Forex can significantly reduce the risks, however, it does not eliminate them completely. Therefore, traders employing this strategy still need to do the proper fundamental and technical analysis of the market before opening positions.

FAQ: No Leverage FX Trading

How does the leverage in Forex differ from its use in the Stock Market and the Real Estate?

According to the US regulations before using leverage in the stock market, a client must make at least $2,000 investment to open a margin account, although there are some brokerage firms, which might require larger deposits. After the account is open, a trader can borrow up to 50% of each trade. For example, if an individual wants to purchase stock worth $100, her or she can borrow up to $50 for this transaction, however, as noted earlier, there is no leverage if the deposit is lower than $2,000. Therefore the effective maximum available leverage is 2:1.
 
One possible reason for such restrictions is the fact that highly leveraged stock market trading was one cause behind the 1929 great depression.
Investors leverage their real estate investments by borrowing from the bank against the given property. The exact conditions of each mortgage agreement can vary depending on the financial institution. However, the most common type of mortgage typically includes the investor's down payment of 20% and the bank lending the rest 80%. If the buyer of the property can not come up with 20%, then he or she might have to pay for mortgage insurance as well.
 
Therefore, we might conclude that in this 20/80 example, investors use 5:1 leverage, and such arrangements are very common in the real estate market.


Can a Forex day trading work without leverage?

Forex trading without leverage can work with any timeframe, including day trading. However, as mentioned before, a trader will most likely need to have a large amount of money in his or her trading account in order to earn significant payouts on a regular basis. So, if you're asking yourself, "can I trade Forex without leverage?" - yes, you can, but it will set you back a lot financially.


What are the average leverage amounts used by the traders at major US investment banks by the time of the 2008 Economic Crisis?

According to Larry McDonald, a former trader at Lehman Brothers, by 2004 the average leverage used by the company’s trading division was 20:1. However, over the next years, this was expanded significantly. As he mentioned, by the time of Lehman’s bankruptcy the average leverage had increased to 44:1.
 
According to the BBC documentary which features this interview, the main competitors of the firm, Goldman Sachs and Morgan Stanley have been more conservative in the borrowing, keeping the leverage ratio between 20:1 to 35:1. Therefore we might safely conclude that overleveraging one of the most important reasons for the bankruptcy of the Lehman Brothers.
 

What are regulatory limitations on the use of leverage in the Forex market in the US and EU countries?

According to the latest regulation, introduced by the European Securities and Markets Authority (ESMA) the leverage in EU is limited to 30:1 in the case of top tier securities, for example, Forex Majors, EUR/USD, USD/JPY and other currency pairs, 20:1 for Minor pairs and Gold, 10:1 for oil and other commodities, 5:1 for Stocks and 2:1 for cryptocurrencies.
 
In the US, the National Futures Association (NFA) enforces regulations, according to which the limit of maximum available leverage is set at 50:1 for the major currencies. According to the NFA, the major currencies are:
 
  • British Pound
  • US Dollar
  • Australian Dollar
  • Canadian Dollar
  • New Zealand Dollar
  • Japanese Yen
  • Euro
  • Swedish Krona
  • Danish Krone
  • Norwegian Krone
 
The maximum leverage is limited to 20:1 for minor currencies. This decision was meant to protect the inexperienced traders from taking on massive risks with high levels of leverage.


What are some common mistakes in no leverage Forex trading?

One of the most common mistakes traders in general make is to ignore proper risk management rules, by using their entire deposit for one, two, or some other small number of trades.  Even if a trader is not using any leverage, investing 50% or 100% of one’s trading capital towards one position can be very dangerous and could lead to massive losses and potentially wipe out the entire deposit. Can you trade Forex without leverage? Absolutely, but you need proper risk management framework to secure your funds.
 
Another common error is not limiting losses on time. Obviously, currency exchange rates usually do not go to zero, so with 1:1 leverage, it should be technically impossible to lose the entire deposit. However, by ignoring the above-mentioned risk management rule, a trader can still lose a significant portion of his or her trading capital. Therefore, when the market moves against the market participant, it is essential to close positions on time and cut potential losses.
So it is essential to keep in mind that although trading with low leverage can reduce risk, it does not eliminate it entirely and a trader still needs to take measures to protect his or her trading capital.
 

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