In this review, we will look at the features of trading without using leverage and help you find an answer to the question whether such trading is right for you.
What is Leverage?
Trading with leverage involves opening a position for an amount greater than what you have in your account using margin lending. In fact, leverage Is the ratio of your capital to borrowed funds. In financial markets, leverage is provided by your broker, usually a ratio of equity to debt is used, ranging from 1:10 or more.
Using leverage, traders with small deposits can open significant positions in the financial markets. For example, having a deposit of $ 1,000 at his disposal, a trader using a 1: 100 leverage (provided by a brokerage company) can open positions in the Forex market for a total of $ 100,000 ($ 1,000 * 100).
Trading with leverage, on the one hand, allows the trader to increase potential profits, on the other hand, it increases possible losses. In contrast, trading without leverage reduces the level of risk in transactions, but at the same time, requirements for the size of the deposit increase. Learn more about trading with leverage in the article: “What is leverage and how to trade with it in Forex?”
Forex trading without leverage
As a rule, Forex trading is conducted using a fairly high leverage (from 1: 100 or more). This is due to the fact that currency pairs belong to instruments with low volatility, and traders compensate for this factor with an increased trading volume. But the use of leverage is optional, you can make profit by trading without leverage. However, this will require a more substantial investment.
The potential profitability when trading without leverage will naturally be lower than when trading with leverage. If the currency has grown by 1%, and the trader bought it with all funds with a leverage of 1: 100, then his profit will be 100%, while the profit without leverage (1: 1) will remain at 1%. But at the same time, the use of leverage also implies the highest risks: if the forecast is incorrect, you can lose the entire deposit in one transaction.
For example, a trader with a deposit of 100 euros and a leverage of 1: 100 opened the maximum possible position by buying 0.1 lot for the EUR / USD currency pair. If he made a mistake with the forecast, and the price goes against his position, the average daily movement of 100 points for this pair will destroy the deposit (1 point = 1 euro), he will have nothing else to trade on.
To open the same buy position of 0.1 lot on the EUR / USD currency pair without leverage, you need to have 10,000 euros on your account. The same movement against the position by 100 points will result in a loss of only 1% (100 euros) of the size of the trading account. The trader still has 9,900 euros left in the account for further trading, while in the first case, the entire deposit was lost. When trading without leverage, it is possible to lose a deposit in one transaction only if the value of the purchased currency is almost completely zeroed.
To trade Forex without leverage, you need to choose a reliable broker that provides the opportunity for such trading (1: 1 leverage). It is necessary to take seriously the choice of a broker, since a considerable deposit will be used for trading (recommended from $ 10,000). In the form of opening an account, in addition to other parameters (trading terminal, account type, account currency), it will be necessary to select a 1: 1 leverage.
Buying shares without leverage
Trading in stocks is significantly different from trading in the Forex market. Stocks are much more volatile than currency pairs. The average daily change in the value of a currency pair rarely exceeds 1-2%, while stocks can fluctuate by 5% or even 10-20% during the trading day. Therefore, buying stocks without leverage can bring higher returns than trading Forex without leverage.
The principle of long-term investment in stocks is based on investing your own funds without using leverage. If you have free funds and want to invest them in promising stocks, you buy stocks without using leverage. Thus, you simply wait for the stock to rise and save yourself from unnecessary risks. You can calmly wait out the temporary decline in the value of the purchased shares, the loss of all funds threatens you only in the event of the bankruptcy of their issuer.
For example, in January 2020, the share price of General Motors (NYSE: GM) was in the region of $ 35 per share. Having a deposit of $ 7,000 and hoping to earn on the growth of stocks with a leverage of 1: 5, the investor buys 1000 shares of this company. But already at the end of February, the crisis triggered by the coronavirus began, and the share price of General Motors began to fall. If the price fell to $ 28, the investor would lose all his funds: $ 35 – $ 28 = $ 7 * 1000 = – $ 7000. In the future, the price dropped even to $ 15, so the deposit would have been lost even with a 1: 2 leverage.
But if an investor invested his funds carefully, without leverage, he would buy only 200 shares ($ 7,000 / $ 35) and be able to wait out this fall. Even a drawdown of about 60%, when the stock fell to $ 15, would not be critical for the deposit. In the future, General Motors shares began to grow, and now quotes are close to $ 60 per share. In this example, careful trading without leverage would help the investor not only save funds during the fall of the markets, but would also bring in a profit of just over 70% at the moment.
Pros and cons of trading without leverage
The following advantages and disadvantages of trading without leverage can be highlighted:
- Less trading risks – the size of the deposit allows you to trade with a good margin of safety, you can wait out the drawdown, waiting for the purchased asset (stock) to grow.
- Psychological comfort – when trading with a high margin of safety, you can not worry about every price movement and spend less time trading.
- Reduced costs – there is no commission for moving a position overnight.
- Large amount of the deposit – you need to have a lot of funds, the recommended minimum deposit for trading without leverage is $ 10,000.
- Moderate profitability – potential profit is inferior to opportunities when trading with leverage.
Whether to use leverage in trading or not is an individual decision of each trader. If you have sufficient funds and prefer long-term trades with moderate risks, then you can safely and comfortably trade without using leverage. To do this, you need to choose a reliable broker and open a trading account without leverage (choose 1: 1 leverage).