Selection of the most suitable amount of leverage for forex trading is something that should require our widespread attention. The right amount of leverage for your forex trading account should always be considered carefully. Most people overlook the leverage while shifting from their demo trading account to a real trading account. Generally, traders always keep their primary focus on trading only while trading from a demo account. They consider it the best method to improve their trading skills, enhance their understanding, and build up a trading strategy.
As a trader, you need to learn that forex leverage will play an essential role in your forex trading strategy. If you are a pro in forex trading, you probably already know that leverage is generally referred to as a double-edged sword. But if you are a new trader and don't know anything about this topic, then it will be wise to learn how leverage works in forex trading.
How to choose the right leverage?
Forex trading can offer you high leverage when it comes to the terms of an initial margin requirement. As a trader, you will be efficient in making up and control quite a considerable amount of money. But, high leverage always leads to increased risks. As it was said before as well, "leverage is a double-edged sword." Forex leverage will offer you considerable gains if you are on the right path in your forex trading. However, the wrong path will lead you to multiple losses with the same leverage. The temptation caused by leverage attracts countless traders. They get greedy and forget to maintain a healthy respect for the market, which is essential for a trader if he wishes to see success.
As a trader, we all are worried about covering up our losses that were done by high leverage in the first place. But if we don't take our next steps cautiously and keep a pang of hunger to earn our losses back quickly, then we can eventually also lose our account.
If a trader makes the right decision by applying the proper money management rules, then the amount of leverage can be unrelated. The principle applies when a trader manager their risk percentage based on their total account balance. It means the total risk amount they will have to bear will always be less than 2% which will be irrelevant to the current amount of leverage.
Leverage is undoubtedly considered to be the main attraction of the forex trading market. Those traders who keep a modest amount of margin always get meaningful exposure to many different financial markets. However, new traders are always attracted to the highest amount of leverage without understanding that it can be a harmful strategy for them as newbie traders.
For example, if a trader has $2000 in his trading account and chooses to use a 100:1 leverage. It will mean that he will have a total amount of $2000 at his clearance. It will allow him to trade with two standard lots. As soon as he buys those lots, every PIP movement will earn him or cost him $20. Even if we assume that a trader has placed his protective stop 10 PIPs away from the point of entrance, a possible triggering of the stop will cost him $200-10% off his overall trading account. A balanced money management strategy will never suggest you take that amount of risk.
Remember that there will always be a relationship between leverage and the impact it causes on your forex trading account. If you use more leverage for trading, your account will face more amounts of uncertainty and vice versa.
Here are a few precautions that can be useful for you to diminish the risks caused by leverage in forex trading:
Use leverage as per your comfort level
Being a novice investor, you should be cautious as well. For comfort trading, you can use a lower level of leverage. It can be 5:1 or maybe 10:1. If you are still inexperienced, don't make efforts to go for a high level of leverage such as 50:1 or 100:1 or even higher.
Limit your losses
With the hope of gaining big profits in the future, you need to learn how to limit your losses to the minimum and ensure survival in the market for the long term. Cut down your losses to a manageable size so you can still keep on trading using your precious capital with gaining more trading experience.
Make use of protective stops.
Protective stops are great helpful tools as even a single distraction from your trading screen can cause you to lose hundreds of thousands of dollars as you miss a sudden price change. As a forex market is decentralized and always remains open, some of the market players make the mistake of keeping their seats open and taking off of the market. Then the very next moment of their return, they find out their account at zero balance. If you leave your trading screen without putting a protective stop, the loss is like a homicide to your capital. Protective stops don't only protect you from losses, but they also keep your profits safe.
Don't make the situation even worse
Please don't turn around to a losing situation by adding more capital and averaging down on it. This situation disobeys the logic by sticking to a losing position and risking more and more capital. Eventually, that losing position becomes so large to avoid, and our account will become unable to hold its position. We will be forced to exit from our position with facing lots of losses.
Even though price actions eventually reverse at some points and make you feel like you should have stuck to it, you should still not lose your patience and avoid making any decision based on your emotions only. It will be better to exit your current position with a minimum loss and offset that loss by entering another winning position.
What Leverage Ratio is favorable for a Beginner?
Forex leverage is simply an amount of trading fund that a broker lends on a trader's investment, which is based on the ratio of their capital to the number of their credit funds.
This amount of leverage provided by a broker is never constant. These brokers tend to set their rates. These rates can reach 1:100 and, in some cases, even more than that. Forex leverage is generally expressed in the term of a ratio. It means that if you are starting with the equity of one dollar, you can open positions for up to 100 dollars.
Let's find out which leverage ratio can be the best for beginners. Many novice traders get attracted to leverage-based trading strategies as they think of it as a big moneymaker.
However, we still need to keep in mind that leverage is always coupled with high risks. Try to understand the most basic concepts first that are connected to money management in leverage-based trading. Some of these concepts are:
· Balance and equity that your account holds
· Margin
· Free margin
· Account-level
· Margin call and stop out
Let's find out the benefits of leverage for a new trader:
High profitability chances
The use of leverage on forex trading allows traders to increase their direct investments to get ready for the bigger games. For example, if a trader has only $1,000 in his trading account, he will be able to trade with$50,000 in the forex market using the leverage of 1:50, or he can also use the leverage of 1:100 to go for a $100,000 trading. It means that a trader will have to risk only $1,000 of his fund in the case of a loss. But, if the card plays its game, he will be gaining a profit of $100,000 if the position will open at 100% at the leverage of 1:100.
Improvement in capital efficiency
Suppose you have an account balance of $1,000 and use a leverage of 1:100; you will end up managing $100,000. It will offer you an opportunity to open more trades in different trading instruments and apply prevarication techniques to provide extra protection against risks. This situation will help you diversify your portfolio, reduce your risks, and increase your chances of gaining more profit.
Low entry-level
The previous example will help us to understand this advantage of leverage. Suppose we have $1,000 in our account, but we don't use leverage. It means that we are trading at a ratio of 1:1. These conditions will best allow you to open one position with the lowest lot of 0.01, and it will not even be on the EUR or USD pair. It happens because one lot is generally 100,000 currency units.
Having 1,000 dollars on our account with no leverage will not even get us an opportunity to open even a small position. However, high leverage helps people even with small deposits of 50-100 dollars by getting them a chance of trading and be on a par with experienced professional traders.
More favorable financial conditions
In the old days, brokers didn't provide leverage to traders. The only chance that a trader could get to trade using leverage was by borrowing a limited amount of funds from a banking institute at a very high-interest rate or huge collaterals or guarantees. Since the competition rose, forex brokers started providing huge leverages to attract more trading clients even with a meager amount of deposits in return for tiny commissions. Trading intraday can also make leverage free of cost for us. If you want to keep your trade overnight, you can take swap into your account.
Convenience
A decent broker will earn his income from commissions by opening new trades, spreads, and SWAPs. That's why it is essential for a broker that clients use their services to become successful and get wealthier. A decent broker will never suggest you consume your entire deposits and never dare to trade using forex again.
That's why forex traders offer an opportunity to traders to choose the most favorable leverage as per their convenience at the lowest interest rates, most flexible tariff schedule, and minimum commissions possible. Some of the reputed brokers will even offer you a personal trading manager. Personal managers are helpful in nuances, choosing the most advantageous leverage, and balancing your trading strategies.
Security
Sometimes, brokers recommend traders replenish their account balance so they can avoid the high-risk probabilities. The process is known as a margin call. This function is made to protect a trader's deposits if a trader is misjudging his risks, and the chance of losing his deposits becomes higher. Sometimes ignorant traders about the leverage and obligations related to it. They start to do irrational trading and end up being the company's debtors. To avoid this situation, a trader should use the services of a broker that can assure you zero balance in case of insolvency of trade. Due to this function, a trader never loses more balance than they hold in their account.
After understanding the benefits of leverage, let's know how to choose the safest leverage ratio that can be most constructive for beginners. Here are some globally accepted rules for traders that are supposed to take into consideration before selecting leverage ratio:
· Sustain low levels of leverage.
· Make use of protective stops to minimize the downside and securing your capital.
· Limit your capital to 1% to 2% of overall trading capital on every position you choose
Being a forex trader, you should always choose the level of leverage that makes you most comfortable. If you are still a newbie and unprepared to take more enormous risks, then the lowest level of leverage, like 5:1 or 10:1, will be the most suitable for you.
Leverage is a fund that a trader borrows from a broker to invest in currency pairs, stocks, and securities. Leverage is the most common term when it comes to forex trading. As investors trade in the more significant positions in a currency, leverage multiplies the returns from encouraging movements in the exchange rate of a currency.
The forex market is well renowned for being the most significant market globally, including more than five trillion dollars of currency exchanges happening every day. Forex trading always involves the purchase and exchange rates of currencies with the goal that this rate will move to the trader's favor. Forex currency rates are displayed and quoted as bid and ask prices with a broker. If, as an investor, you wish to go long or make a currency purchase, they would be quoted as the Ask price, and if an investor wants to sell the currency, they would be cited as the bid price.
Investors use leverage to gain profit from forex trading. The forex market offers the maximum amounts of leverage available to investors. Leverage is a loan that is lent to a trader by a broker. The trader's forex account is customized to allow trading on margin or rented funds. Some brokers may try to limit the amount of leverage used initially with new traders. In most cases, traders can modify the amount or size of the trade based on the leverage that they need. However, the broker will require a proportion of the trade's estimated capital to hold in the account as cash, known as the initial margin.
Why is Forex Leverage highly valuable For Beginners?
Forex leverage is known to be the primary attraction of the forex trading market. Forex trading offers traders higher leverage than stock market trading. With this leverage, a trader will require only an initial margin or a small fund of capital in his account to gain access to large positions. Leverage of 100:1 is the most common leverage in the forex market. It allows a trade to trade for $100 for every $1 in his account. Simply put, as a trader, you will be able to trade for 100 times more value for the amount value that you hold in your account.
Leverage indeed proves to be the most valuable tool for a beginner as it allows them to take advantage of its offerings and use it to increase their profits.
Here are a few benefits of leverage that proves its value for beginners:
· It allows new traders with small capital to make larger trades using leverage. They will only need to deposit a primary margin which is a small ratio of overall trade value.
· Leverage helps us to trade using borrowed money from a broker. However, you will not need to pay any interest charges on that leverage. It makes leverage a profitable and economical proposition.
· As a trader, we can make large trades with leverage. We get the potential to multiply our gains if we make a profitable trade considerably. It's not possible if a trader uses his own money in his trading account.
Final words
Forex leverage can do wonders for forex traders if they use it appropriately. It allows traders to enter forex trading with a small amount of borrowed capital from brokers so they can execute their trades. However, if you are a new trader and are not aware of the functions of leverage, it can also devour your whole capital, leaving you with massive losses. By following the different tips and strategies mentioned in this article, a trader can always improvise his trading skills and gain higher profits by using the proper leverage for forex trading.
Real-time News
