Today a lot of traders think that trade Torex without leverage is the best solution and highly recommended, both for safety in work and for conservative profit (which is expected to be higher than the annual interest from the deposit on the bank account). Actually, it is not. If a trader works in Forex only on his funds, he will still be charged swap and spread, and he will still have a deposit level, and he will have to close trading positions in the market with a loss. One will not be able to enter the market in such a way that he can always wait for the position to make a profit.
On the other hand, everyone will agree that Forex leverage is a beneficial tool for all parties involved in currency trading. Now, this opportunity is perceived by participants as a great chance to open a successful trade without having a lot of personal funds. Experienced players know what leverage is and how to use it properly. Proper use of virtual funds, which are provided by brokers, can bring a decent income.
So, let's take a closer look at this topic and try to decide what type of trading is better - with leverage or without.
Forex leverage is the ratio of the volume of trader's money involved in a transaction to the total amount of funds available on deposit.
Brokers and dealing centers (DC) provide different leverage values from 1:1 to 1:1000 (some brokers). The leverage is a virtual loan that is provided to a trader to make a trade. To enter the interbank currency market, you need to step over a certain threshold, which is set at $10,000. Therefore, for those who do not have such an amount, and begins his work with a small deposit (e.g. $500), has the opportunity to use the leverage to increase the money in the position and, accordingly, profits, the opportunity to enter the interbank currency market. The use of credit resources of the broker does not impose certain obligations and payments to the broker. The credit is given for the transaction without transfer to the trader's account and is immediately withdrawn for the trade. It sounds scary, but in practice, everything turns out to be easier.
Broker does not risk its money; all the risks are assumed by the trader. In the case of the closing of a profitable position, the broker will deduct the amount of borrowed funds, all the rest remains to the trader. When closing a losing trade, the broker also deducts his funds, the lack of which is filled out from the trader's deposit. If such a situation occurs, a Margin Call situation takes place.
A margin call is a call to the trader with the notification that his account is running out of funds, he can either replenish the trading account or close the position with some loss. This was relevant when trading was executed over the phone. Now, this function has become automatic. When a trade comes to a loss, the broker forcibly closes all trades as soon as a certain amount of loss is reached. The amount the broker will return will be equal to the amount of deposit minus loss.
A Financial Leverage Example
To get a clear understanding of what Forex leverage is, let us have a look at the example:
Let`s say, on a trading account with a balance of $1000, the leverage is 1:100. We decided to open a trade on the EUR/USD pair of 10,000. The position is opened at the price of 1.0950, Stop Loss is placed at 1.0850. The margin required to open a position is €10,000 x 1/100 x 1.095 = $109.50. In order not to waste precious time calculating the margin for each and every position, here is a Margin Calculator. For a $10,000 position volume, one pip (4th decimal place) is $1, and the difference between the opening price of the position and the level of limitation of losses is 100 pips. Therefore, if the price goes in the opposite course, the loss will be $100. Without limiting the losses, they could be much bigger depending on when the position is closed. One can set a Stop Loss for both a short and a long position, and choose the price at which it will trigger. This is why Stop Loss is an indispensable tool for risk management.
Forex Trading With Leverage
Trading Forex with leverage is a very profitable exchange instrument, has a lot of advantages and advantages. Leverage on Forex allows traders to increase the deposit and make quite profitable trades.
Let us have a look at the advantages of trading with leverage:
Simplification of access to the Forex market;
The ability to implement effective strategies, as well as own knowledge with a higher degree of financial efficiency;
The tool is mutually beneficial for both parties (broker, trader);
The leverage tool has opened up access to the market to hundreds of thousands of newcomers and is still a decisive factor that allows anyone to trade (not as before, only those who have from 100 thousand USD).
Nevertheless, there are some drawbacks of the trading with leverage, for example:
Higher risks since concerning only real funds of a trader, and not those that are provided for management thanks to the leverage;
The need for clear and detailed study, analysis and calculation of market indicators (otherwise, the slightest fluctuations will lead to the loss of funds);
The presence of a high threshold for knowledge when trading with leverage.
Leverage is a great opportunity to expand trader`s capabilities and increase tarding capital without having to make a huge deposit. Also, its significant advantage is that it has nothing significant to do with loan. Therefore, one should not worry about the profit, it will not be deducted to repay various interest.
It needs to be mentioned that any trading with leverage can ensure successful trading if one uses the opportunities provided correctly and competently. The ideal way to choose the leverage is to calculate all the risks and plan the outcome needed. Inexperienced beginners try to keep up with huge opportunities but forget about the possibility of losing all the deposit. One needs to clearly understand what the leverage in Forex is and know all the features of this instrument.
However, despite all the advantages of this instrument, one should not forget about the risks. It is necessary to soberly assess the capacities and the market situation. Only in competent hands, the leverage can turn into a big profit.
Forex Trading Without Leverage
Almost all deposit losses occur due to multiple trade volumes exceeding the funds on deposit.
It is not for nothing that many countries regulate margin trading, in some of them, it is forbidden for brokers to give the leverage more than 1:5. And expert traders, having heard about the leverage 1:10, just utter confusion.
Trading Forex without leverage means to rely on own funds or to monitor the trading process 24 hours a day and build the most effective strategies to rise to significant profits with minimum investment. Experienced traders who have already made their capital on the exchange can easily trade without additional financial support and keep financial leverage at 1:1. At the same time, this does not imply a complete transfer of stock exchange players to Forex without any leverage - speculators often combine opportunities to increase profits, both with the help of a loan and without it. Here it is worth noting an important nuance, which is remembered by experienced traders, but quite often forgotten by beginners - the larger the leverage, the higher the risks of losing a deposit, and vice versa, the smaller the leverage, the lower the possible risks.
Keeping this in mind, currency market players always calculate their opportunities before resorting to financial help from brokers. On the plus side in this situation, the size of your loss is strictly limited to the size of your deposit, which will not allow you to go into the negative balance. Leverage-free Forex has its features, which should be taken into account for effective earnings. The first such feature is the presence of a decent initial capital. The principle is very simple - the bigger is the deposit, the higher is the prospective income from positions. If there are no personal savings, one can try on the role of a PAMM account manager. Attracting new participants and investors, the trader gets additional financial security without the need to make a loan.
The second feature is to catch sharp movements in the chart of currency pairs price fluctuations. The trader needs to catch moments when the price of currency and other assets rises or falls sharply by several percents at once. This can happen several times per day or per hour. As soon as it is possible to detect such a spike, it is necessary to open a trade and close the position at once, and then proceed immediately to search for another profitable moment. The more positions can be made on the calculation of these leaps, the more total profit will be. To improve the quality of this system, it is recommended to work with different currency pairs.
Taking into account all the above-mentioned, it is clear that in Forex trading without leverage requires at least basic knowledge and the ability to apply it in real trading. In this case, one will not always be able to earn more than 10% of the deposit on the trading account. This confirms the fact that, despite all the possible risks, the use of financial leverage increases the opportunities for a trader, regardless of his practical experience. Modern technical means and programs fully provide the possibility to get a "loan" from a broker, literally, just staying at home.
To Leverage or Not to Leverage
To answer that question, one should take into consideration the strategy applied, the risk tolerance, balance on the trading account and the financial purpose sought. Of course, it is up to a trader to decide if it is better to trade with or without leverage since so many things need to be considered.
The most important point here is that with the level of leverage, trading risks grow accordingly. BUT the same happens to the profit potential.
For those who are still in two minds and not sure what to do, we can advise starting with the minimum leverage. In such a way it is much easier to see how exactly leverage works and later, if needed, it can be adjusted.
To earn safely on the foreign exchange market, one does not need to refuse from leverage, but learn how to work with it effectively, controlling the amount of its use. This is a little different from controlling trading volumes, as the size of the leverage directly depends on the size of the deposit. That is, with the same trading volume, its value will change with the way the size of your trading account changes. This is a kind of bar, if one always sticks to the originally calculated value, there will be no problems with risks.
Many people think that with the leverage 1 to 1, there are no risks and one can safely earn, forgetting to take into account the fact that the trading position may take years to drawdown on negative swaps.
Leverage - difficult to use, but convenient and profitable tool for trading in financial markets. It has both the possibility of quick enrichment and rapid devastation for any of the traders. Therefore, its use requires concentration of thoughts, carefulness and application of a wide list of precautionary methods. The use of leverage without a proper system, application of knowledge and skills, providing a course only to emotions and momentary impulses, will be nothing more than a lottery with a scanty chance of huge success and a great chance of failure and ruin.