In terms of leverage, we often see advertisements in large numbers, brokers trying to attract new traders and new Internet users with the promise of very high leverage . In fact, the new standard of leverage given by brokers these days is around 500:1, which would have been inconceivable a few years ago. Some people, however, still swear not to use leverage, to use an account with 1:1 leverage, which means that you will only use your own money without borrowing from the broker. This of course has advantages, which we will examine in this article. So let's see what are the benefits of non-leveraged trading.
What is leverage?
But before that, a very brief overview of what leverage really is. Leverage is a way to use more money than you have in your account. If you have 100:1 leverage, that means for every dollar in your account, your broker will let you invest $100, they will just lend you the other $99. So, a balance of $1,000 in your account would have the power to trade with $100,000. This allows you to place larger trades, which gives you greater profit potential, but it also increases the risk of you placing your balance with larger trades.
So there are certainly advantages to trading with higher leverage, especially the profits we all seek. There are however advantages to keeping leverage low, so let's see what they are.
The benefits of leverage
One of the main benefits of keeping leverage low is that it allows you to better manage the risk in your account and can allow you to survive large losses for longer. If we have trade power with $100,000, that means for an account with 100:1 leverage, we need only $1,000, but for an account with 1:1 leverage , we actually have to have the $100,000 in the trading account, which seems like a downside, it's true, but hear us out.
When we trade with a leveraged account and the value of the trade drops by $1,000, you are technically left with $99,000, right? Wrong, thanks to leverage you were able to place these trades, but the $1000 drop will have completely blown your account. With 1:1 leverage, however, your account would be pegged at $99,000, and only the $1,000 would be lost. This therefore allows you to survive larger moves and consecutive losses that would otherwise blow up a leveraged account.
There is also a lot more transparency when it comes to 1:1 leverage, what you see in your account is what you have and what you can trade with. It can be quite confusing to trade with leverage, determine your margin level, determine your trading power, etc. With 1:1 leverage, you know exactly what you have and you know exactly what size trades you are able to make. This level of control and transparency can facilitate the analysis of your own account and the development of your risk management plans as well as your risk/reward ratio.
Trading with low leverage keeps losses in line with your account balance, we have already mentioned the heavy losses that can come from leveraged accounts, we just wanted to confirm this again. When we trade with low leverage the losses are in line with the account, you will be in a much better position to manage those losses and be able to take a number of them at a time, avoiding making huge damage to your account. You also have no responsibilities when you are not using leverage, many brokers will charge you some form of interest (swaps)for using their leverage, so making trades or just placing them may mean you have to pay your broker a fee. Having 1:1 leverage means that you are not borrowing money and therefore do not have to pay interest to do so, which is another advantage and allows you to save some of your capital.
Impact on margin calls
Non-leveraged trading also allows you to avoid these margin calls, these are levels set by your broker that have to do with your margin levels. When your margin level falls below the set amount, the broker closes all your trades, in order to protect you and prevent you from falling into a negative balance, which often happened in the past with leveraged trading. Not having to worry so much about margin calls can reduce a trader's stress level. It will be very difficult to get a margin call on an unleveraged account just because you are not borrowing money, you see what you have and therefore margin requirements are not as relevant.
Impact on mental health
Trading with low leverage can also benefit a trader's mental health . Trading can be stressful, and when done with leverage, you add to that risk and the stress you will experience. You are risking more per trade and therefore each trade will bring you additional stress because you are risking your own money. With a non-leveraged account, you risk a limited amount and therefore the risks are lower, as is the stress you put on yourself. If you are a risk averse person, a small leverage will suit you perfectly.
So these are some of the benefits of non-leveraged trading, we're sure there are more; there are of course some downsides as well, as there are with any form of trading or amount of leverage. You need a lot of capital to start and it will take you longer to make decent profits, but you have to weigh the pros and cons. There are definitely a lot of advantages to trading with low leverage, especially if you are not a risk taker.