Leverage is one of the key features of forex trading that have driven retail investors to jump on the bandwagon, and if you’ve been trading in the forex markets for any length of time, you’ll be aware of the pros and cons of using leverage. While the forex market is lucrative for many traders, it could lead you down the rabbit hole if you don’t choose the right leverage for your strategy. Besides, most forex brokers’ websites, brochures, or terms of service state that leverage can lift profits, but it also has its own risk.
All forex brokers provide leverage, although this varies across forex pairs, and most retail traders employ them despite knowing the risk to their capital during adverse market conditions. So, the question is, if leverage is risky, can I trade forex without leverage?
This article explains what l leverage is, how it’s associated with margins, how it boosts profit, amplifies risk, and how to reduce it. We also cover leverage costs and how to calculate them and some market participants who would be better off not using leverage.
What is Leverage?
Leverage allows forex traders to manage large positions with relatively less capital by borrowing funds from the broker. Unlike traditional investing, where you pay for the entire value of an asset, you only use a small portion of your funds or a margin for leveraged trading. In simpler terms, leverage is a loan from your forex broker to help you open a large forex position with little capital.
Traders can use this leverage to day trade or hold overnight positions. Since leverage involves borrowing funds, the forex broker charges interest on the borrowed money if you carry forward or roll over your trade to the next day/days. However, interest is not charged if you use leverage to day trade or exit your open positions by the end of the trading session. The interest rate or overnight financing or the rollover rate is the cost of borrowing funds to keep your trades open for the next day and is generally applied at 5 PM ET. The rollover rate is the interest rate differential between the two currencies in a pair (Ex: GBP/USD) and will change depending on the spot price, whether you’re long or short, and will vary from one currency pair to the other. So, depending on the currency pair and the direction (long/short) of your trade, you will either pay or earn rollover costs.
The formula to calculate the overnight financing rate is:
[(Closing price/Lot size) * tick value * applicable interest rates] / 365
First, however, you must maintain some money in your trading account, which you will eventually use as a margin to access leverage from your forex broker.
The leverage offered by forex brokers depends on the FX pair you trade and the country where the broker operates. For instance, forex brokers registered in the UK or Europe can provide max leverage of only 30:1 in some major FX pairs. Likewise, the leverage offered by forex brokers in other countries depends on the market regulator, and in places where there are no restrictions, brokers even provide leverage as high as 500:1. In other words, if you have a deposit of $1,000 and your forex broker offers leverage of 500:1 on the USD/CHF pair, you can leverage your forex trades by as much as $500,000.
Is Forex Trading Without Leverage Possible?
Before we discuss whether you can trade without leverage, let’s look at how leverage works.
If your broker allows you to leverage 50:1 or 50 times the margin, it means that with $1,000, you can control a trade worth $50,000. For example, suppose you used the entire leverage offered by your broker to trade the EUR/USD pair and made a profit of $500. Since your investment was only $1,000, your return on investment (RoI) will be $500/$1,000 = 50%. On the contrary, if the markets went against you and you lost $500, your return on investment (RoI) will be minus 50%. That’s the risk of leveraging positions.
So, the question that naturally arises is, can I trade forex without leverage? The answer is yes, but not all forex brokers give clients a choice to trade without leverage. So, as an individual, you have to look for a forex broker that doesn’t compel you to leverage your trades.
In the above example, we have shown how profits and losses are accounted for in leveraged trading. Now, let’s understand how it works when your trades are not leveraged.
Taking the above example, if the cost to trade one lot of the EUR/USD pair is $50,000, you have put down the entire sum. Let’s say you made a profit of $500. Since your investment was $50,000, your return on investment (RoI) will be $500/$50,000 = 1%. However, if the markets go against you and you lose $500, your return on investment (RoI) would be minus 1%.
So, trading forex without leverage cuts down the risk of adverse price movements drastically, but it requires enormous capital to earn meaningful profits, which may not be possible for many retail traders.
Who Should Trade Forex Without Leverage?
On average, most forex pairs oscillate between 0.5%-1.0% daily, and leveraging makes trading exciting because even a 0.1% gain with the proper leverage could earn traders 2%-3% in profits. On the other hand, since leverage coupled with volatility directly influences your P&L, the returns from trading forex without leverage could be small. However, this could be an excellent opportunity for beginners graduating from a demo account to a live trading platform to hone their trading skills. During the initial days of your trading journey, the size of the profits is unimportant. What really matters is how well you analyze the markets and profit from them.
The other category of traders who can afford to trade forex without leverage is those looking to earn decent returns from the price volatility associated with the forex markets. This type of investor is not looking to make a living by trading forex, or they could be diversifying their portfolio by investing in specific currencies or might even be holding some savings in alternate currencies over the short-medium term. Their primary goal is to protect their investment from volatility while they earn small, consistent returns in the process.
Although most retail traders are lured to the forex markets because of the high leverage brokers offer, trading forex without leverage drastically lowers the risk. After all, financial institutions and banks transact billions of dollars in the forex markets, mostly without leverage.
How to Use Leverage Safely
Forex trading without leverage is not fun, although it takes away the risk by minimizing losses from adverse market conditions. Besides, most CFD brokers don’t provide the option to trade without leverage, even if you have sufficient capital in your trading account. So, to execute unleveraged trades, you must first find a broker that permits it.
However, if you cannot find a forex broker to carry out unleveraged trades, the next closest option is to manage risk using the leverage the broker offers wisely. Start by choosing a forex broker providing low to moderate leverage. Next, maintain sufficient funds in your trading account to cover potential losses from holding overnight positions. Lastly, ensure all open positions have mandatory stop loss and take profit orders in place.
Related Articles
- A Guide to Risk Management for Forex Trading
- Risk Management Strategies for Forex Trading
- What are Leverage and Margin in Forex Trading?
Safe Forex Brokers
To leverage or not to leverage is an individual choice. However, it would help if you choose a forex broker who provides the right mix of the safety of your funds, state-of-the-art trading platforms, low-to-moderate leverage, the choice of conventional and automated trading, and robust customer support.
As part of our efforts to keep readers updated with the recent trend in the industry, we are constantly gathering information and sharing them with you so that you make the right trading choice. Besides, we are monitoring the activities of the several hundred forex brokers worldwide to help you choose the safest and those that meet most of your trading criteria.
Before signing up with a forex broker, we suggest you look at our table of recommended brokers below.
| Broker | Features | Min Deposit | EURUSD Spread | ||
|---|---|---|---|---|---|
 Your capital is at risk
US Clients: No Regulated : Yes
|
– Regulated by FCA, FSCA, CMA and FSC |
$200 | ECN 0.1, Standard 1.6 | ||
 Your capital is at risk
US Clients: No Regulated : Yes
|
– Flexible leverage up to 500:1 |
$200 | From 0.1 | ||
 Your capital is at risk
US Clients: No Regulated : Yes
|
– 40% New Member Bonus
|
$100 | Fixed |
Sign
Up
Europe* CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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 * 82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money
US Clients: No Regulated : Yes
|
|
100GBP/AUD/EUR/USD | variable |
Sign
Up
* 82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money
|
|
 Between 74-89 % of retail investor accounts lose money when trading CFDs
US Clients: No Regulated : Yes
|
|
$200 | NDD 0.09 / Standard 0.69 |
Sign
Up
Between 74-89 % of retail investor accounts lose money when trading CFDs
|
|
 76% of CFD traders lose money
US Clients: No Regulated : Yes
|
|
$50 (varying by Country) | from 1 |
Sign
Up
76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
|
|
 Your capital is at risk
US Clients: No Regulated : Yes
|
|
$5 | From 0.0 pips | ||
 Your capital is at risk
US Clients: No Regulated : Yes
|
– CySEC, FCA, FSCA, SCB Regulated |
$100 | |||
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Summary
Leverage allows retail forex traders who don’t want to allocate large sums of money the opportunity to trade in the forex markets. In addition, small investors with limited funds at their disposal have the chance to test the forex markets without risking too much capital. However, as a trader, you should be mindful that leverage magnifies profits and losses and should be used cautiously.
On the contrary, unleveraged trades protect your investment from adverse price movements and lower your trading costs linked with borrowing money from your broker. Besides, you can hold positions as long as you want to since you don’t have to pay rollover fees.
Leverage can undoubtedly help with your forex trading if you employ it as a trading tool instead of a means to multiply your money quickly. It is a powerful instrument if used correctly; else, it can wipe out your capital in minutes.