Trading Without Leverage [My Pros And Cons]
Many beginner traders feel more comfortable trading without leverage when they first start out and this is completely normal.
The downside I see however to not taking advantage of the increased buying power that is offered by many leverage brokers is the fact that your profit potential is limited.
This can be a problem for underfunded traders who are starting out with a smaller account size.
In this guide, we will take a closer look at the benefits and drawbacks I see of trading without leverage to help you make a more informed decision as your start out.
- Trading without leverage means you are not using borrowed funds from your trading platform to increase your position size. When trading without leverage, your profits and losses are based only on your own trading capital, and there is no potential for amplified trading results.
- The advantages of trading without leverage include limited risk, no risk for margin calls or liquidation, lower trading costs, no interest costs, and less stress.
- The drawbacks associated with trading without leverage include limited profit potential, slower account growth, reduced flexibility, and reduced access to markets. Factors to consider when trading without leverage include capital requirements, trading strategies, and market conditions.
Table of contents
- Definition of trading without leverage
- Factors to consider
- Comparison of trading with and without leverage
- Which is more suitable for different types of traders
- Example of trading strategies without leverage
- Choosing a broker without leverage
- Conclusion – Is trading without leverage better?
Definition of trading without leverage
Trading without leverage means that you are not using borrowed funds from your leveraged trading platform to increase your position size.
I also consider it equal to trading with 1x leverage which is the same as not using any leverage at all.
This can be achieved by simply choosing a broker that doesn’t offer leveraged products.
When we trade without leverage we simply choose a non-leveraged broker.
Products that have built-in leverage are forex, spread betting, and any product offered by CFD brokers.
When trading forex without leverage, for example, your profits and losses will be based on your trading capital alone and there is no potential for amplified trading results.
When buying or selling financial instruments without the use of borrowed funds your risk is greatly reduced which can be a positive thing for a beginner trader.
When I started out I found it much easier to trade a non-leveraged account until I had learned which strategy I wanted to use and what market was best suited for me.
Advantages of trading without leverage
What are some of the biggest advantages to non-leveraged trading you might ask?
When we are trading the financial markets without borrowing money in for example stocks or ETFs, there are many perks that beginner investors or traders will find useful.
Here is my list of things that are beneficial:
- Limited risk: This is the most obvious benefit. Traders who choose to trade purely with their own capital will find that the risk is reduced significantly. This can be a great way to practice your strategies knowing that you are not exposed to wild swings in your account balance. It is also true that you can lose more than you invest with leverage so the risk of falling into debt is also removed.
- No margin call risks: Another good thing is that you will never have to worry about margin calls. This is because there is no margin requirement that is used as risk capital when trading large position sizes.
- No liquidation risks: Forced liquidations are a big problem for novice traders as they usually don’t see them coming. The only way to find out what your liquidation price is is to use a liquidation price calculator which many beginners are not aware of. This risk is completely removed since you are not running the risk of getting liquidated.
- No interest costs: The interest cost is applied to leveraged positions that are carried over to the next trading day. This is a rollover fee that is charged by your spread betting broker or crypto leverage trading platform for holding the position overnight. This fee is based on the interest costs that the crypto exchange is charged by the banks they use. Since leverage is considered a loan, it is also subject to interest payment, something that you can avoid by not using leverage.
- Lower trading costs: Leveraged trading commissions are more expensive than regular commissions simply because the position size is reduced. Trading without leverage can help you keep your costs down.
- Less stressful: You can experience a lot of stress when amplifying your potential losses and this could cause costly mistakes. Choosing not to trade with increased buying power will relieve you of this stress.
Drawbacks associated with trading without leverage
When we choose to trade without increased buying power there are also some disadvantages that come with it.
In our experience, trading without leverage brings this drawbacks:
- Limited profit potential: How does leverage trading affect profit is a common question and the simple answer is that the increased buying power increases position size which in turn increases profits. For example, trading with 10x leverage will directly increase all your profits by 10 times. A trade without leverage that would normally result in a $50 profit will be increased to $500 with leverage. That creates immense profit potential which is removed when trading forex without leverage.
- Slower account growth: Growing your account is essential for long-term growth and leverage can help you achieve this by adding more buying power to your setups. If you remove the leverage it can take a lot longer to achieve long-term success.
- Reduced flexibility: Trading several markets at the same time is very good for diversifying your portfolio but this can be difficult in non leveraged trading. If you only rely on your own trading capital you might limit yourself to only one or two markets.
- Reduced access to markets: Many trading platforms without leverage lack certain markets such as forex and options. Limiting yourself to only a few markets can slow down your growth and as a professional trader, you should be able to trade any market.
Factors to consider when trading without leverage
Take some time to study the different factors that will affect your trading the most before choosing how you want to trade.
As a market speculator, it is your job to figure out how you can best go about it to make profits.
Whether that includes leverage or not doesn’t matter, as long as you have a plan that you can follow.
When we get asked about the factors to consider, here are some you can consider that we have found helpful:
- Capital requirements: How much capital are you going to need for your strategy and will your own money be sufficient?
- Trading strategies: What strategy are going to use? Are you a day trader or a swing trader?
- Market conditions: What type of market are you going to trade? Is it highly volatile or is it a more calm market?
Once you know the answers to these questions you should be getting closer to making a decision.
For example, if you are trading cryptocurrencies that are highly volatile, you might not need to use leverage since the daily fluctuations can surpass 10% and even 20%.
This type of trading doesn’t require a lot of capital and your profits might be sufficient for non-leveraged trading.
How we compare trading with and without leverage
When we compare the two different trading styles we usually look at short-term traders and longer-term investors.
A maximum of 1:5 leverage is rarely used but it can be a good strategy for some investors that have high conviction in their setup but most of the time they invest without leverage.
Short-term traders such as day traders or scalpers on the other hand are much more likely to use high leverage trading.
In our own trading, when we use a short-term strategy such as scalping, we find it to be much more profitable to add leverage due to the increased position size.
However, in my own long-term portfolio of stocks, I hardly use any leverage at all.
Instead, I track my average price with our average stock cost calculator to see how much I have paid and at what price I break even.
Which is more suitable for different types of traders?
Deciding on whether or not to use leverage when investing or trading comes down to what type of trader you are.
If you are a trader that is moving quickly in and out of the market several times per day with an average holding time of a couple of minutes then you might be better off using leverage.
But if you are a long-term investor who stays in position for months or up to years, then you are probably better off using only your own investment capital.
The shorter your holding time is the more leverage you are allowed to use as a general rule of thumb.
For example, the best leverage for day trading or scalping is totally different from how investors use leverage.
When I use a crypto exchange with high leverage I am very careful with my entries and I don’t increase my buying power on every trade.
Most investors don’t use leverage but those who do are very careful to not overleverage.
My approach is to start off with low leverage when you are a beginner and increase the amount borrowed as you learn.
This is how I learned the basics of leveraged markets before I took the decision to increase my trade size.
Examples of my trading strategies without leverage
Some of my most popular trading strategies with leverage are very different from the ones used without.
Below are some of my most used non-leveraged strategies:
- Buy-and-hold: The buy-and-hold strategy is the most simple and easy-to-follow strategy for investors. Once you have analyzed the market and figured out the best asset class to invest in, you simply buy and hold the asset. Holding times are usually up to a few years and even decades.
- Swing trading: Swing trading is very similar to the buy-and-hold strategy with the only difference being that the time in the market is shorter. Swing traders tend to hold positions from a few days up to a few weeks or months. This gives them a shorter time horizon to make a profit but they spend more time studying their markets and are usually more aggressive with the sizing of the position.
- Value investing: Value investors look at their potential investments in terms of future value. They are not driven by chart reading or any other technical tools. They read the balance sheets and income statements of the company they are going to invest in and try to predict which stock will bring the most value in the future.
- Dollar-cost averaging: This is another popular trading strategy that is used without leverage. The dollar-cost averaging strategy works by continuously making re-investments in your asset at pre-set time intervals. For example, you might look to dollar-cost invest in Bitcoin and this can be done by investing $500 every month. The trick here is to stick to the investment plan and don’t change the amount or the time of investment.
All of these strategies are used without leverage and are widely known by the investment world as good options for the high risk alternative.
How I choose a broker for trading without leverage
When choosing a broker without leverage it is important to look for certain requirements that your own strategy has such as a good technical charting interface or complex order selections.
The criteria for selecting a broker will be different from trader to trader.
For me, I like to have the flexibility of being able to turn on and off the buying power.
Some traders need a great order book to execute trades while others are only looking for a broker with low fees.
Look for a comparison of brokers offering no leverage to see which one suits your style of trading best.
A general tip for finding a suitable broker is to look for a regulated platform.
These brokers are always more secure as they have watchdogs looking over their shoulders 24/7.
Security should be your number one priority and from there you are free to choose between different trading tools.
If you don’t have the proper funding you might need leverage to open trades that are big enough to yield a decent profit. However, if you have enough trading capital you don’t need to add leverage.
Yes, many professional traders use leverage to either open larger positions or to avoid risk. Risk can be reduced by replacing some of the position sizes with leverage instead of using your own funds.
Many brokers such as crypto exchanges, stock brokers, and investment platforms offer investment and non leveraged trading. Degiro is an example of a broker that offers trading without leverage. Many banks do also offer this feature.
The best leverage for a beginner is usually between 1:2 and 1:10.
Yes, you can find many unleveraged markets that are available on regulated brokers. Look for a platform that is regulated by your own government.
Yes, it is possible and it is known as non leveraged forex trading. This can be done through a forex broker that offers the option to change the leverage ratio on your own.
Conclusion – Is it better to trade with or without leverage?
Whether or not it is better to trade with or without leverage comes down to each trader and their specific needs.
I find it more useful to trade with leverage since it gives me more flexibility
The factors we have pointed out in this guide should help you make a good decision.
To summarize, these are the most important factors when choosing to trade with our without borrowed money:
- Potential profits
- Trading costs
- Stress levels
- Market conditions
- Risk limits
Trading without leverage is typically how most traders start out and if you are a beginner trader you might find it easier in the beginning until you have learned the craft of trading.