Leverage in Forex - What is Leverage in Forex?
Updated: Feb 23
The Forex traders are able to take control of the larger investment in Forex trades through the use of leverage when they only have a small number of deposits in their trading accounts. Using the Forex leverages the traders are capable of magnifying their trading profits. This is because small investments cannot do well in Forex trading since they cannot generate high profits.
Leverage involves borrowing a particular amount of money from the Broker and uses it to increase your trading position beyond the limits where your Forex account balance alone cannot take you through.
Leverage is when the Forex traders use their borrowed money and invest in the currency, security, or stock. The Forex trader can be able to trade very large positions in the currency through the borrowing of money from the Broker.
Leverages are used to increase the returns from the favourite moments of the rate of the foreign exchange. Therefore, leverage is a benefit to the traders, and they can use it to increase their earnings. However, leverages also increase the chances of suffering huge losses.
This is the reason why the Forex trade beginners are discouraged from leverages. You need to have great trading experiences, or you learn how to effectively manage the leverage and successfully implement risk mitigation strategies to prevent the occurrence of any trading risk.
The Forex markets offer various amounts of the leverages, and the Forex traders use the leverages to increase the profit from the trading. In other words, leverage can be described as a loan that the Forex broker provides to the trader.
What is the best Leverage for the Forex Trade Beginners?
Majority of the Forex traders were attracted to the Forex market by Leverage. This is because, with the best leverage, the traders with a modest margin amount will be able to achieve considerable exposure to a variety of financial markets.
One of the significant challenges that face Forex traders, especially the beginners, is how to choose the best leverage for their Forex accounts. Majority of these Forex trade beginners is they are always attracted or tempted to select the highest amount of leverage provided. However, the highest leverage provided is usually the best for you, especially if you are a newbie in the world of Forex.
The highest leverage is best for the experienced Forex traders because they are capable of using it correctly. The new traders can take the opportunity offered by leverage to open up the larger positions to achieve the best results faster and better from their trades.
The main drawback of selecting the highest leverage is that you can end up in massive losses that you will never forget in your Forex trading career. This is because, every time your position fails to play out as you expected, there is always a larger loss results with less margin for the coming trade.
How to Choose the Best Leverage for Your Forex Account
Choosing the best Leverage for your Forex account tends to be a challenging activity, especially if you are a Forex Trading newbie, and you do not have enough experience. The decision you take here can massively affect your account, leading to trading success or loss.
Most of the Forex brokers, especially those that do not come from Europe, offer a leverage of up to 1:500 and this is somehow normal. In some cases, some brokers go high even up to 1:3000. You should not pick such high leverage during the selection of leverage like that for your Forex account.
The Forex Brokers who offer up to 1:500 generally provide your options on how you can choose your own settings. However, this can be tough sometimes because it is still challenging to understand the best leverage ratio you should choose for our account.
To select the best ratio for you, you should consider the following factors:
⦁ What will be your risk if you select that particular Forex ratio? This risk comes in the form of the amount of drawdown that will be attracted by your Forex account.
⦁ The amount of the balance that you are willing to deposit
⦁ The number of positions that you will allow yourself to open at a particular time.
The Best leverage for the Low balance Forex Accounts
Suppose you are operating a Forex account with low balances such as $10 or even lower than $500. In that scenario, you will be required to have a fair amount of leverage to trade and obtain a free margin in your account and sustain the amount of drawdown if the trade fails. A small account requires high leverage and a higher risking percentage of the account balance.
With a deposit of $500 in your Forex trading account, it will be very different because there will be plenty of the free margin to control the occurrence of any temporary drawdown. However, the newbies in the Forex market ends up using leverage to open up more position s and increase the size of the positions.
How Does Leverage Affect Forex Trading
In most cases, the Forex Brokers allow leverage at 50:1, 100:1 up to 400:1. This ratio dictates the amount that Forex traders must deposit in their trading accounts in order to trade.
Importance of Leverage
The incremental changes in the Forex trade rate values are measured in 1/100 of a single cent or $0.0001. However, the prices of the currency can change from just a few pips and increase to hundreds of pips in a single day. This means that a currency that is worth $10k can translate just a few dollars into hundreds of dollars.
Every Forex trader trades with the aim of making a profit. Therefore, no trader is willing to trade a higher amount and gain a very little amount of profit in a single day. For example, for the leverage of 100:1, a trader will be required to deposit a small amount of $100 dollars.
Regulations for Leverage
A Forex broker established in a specific country can accept the deposits from any Forex trader across the world and start trading. The regulation that governs the leverage other operations of Forex trading depends on the local laws.
The leverage extent that a broker can allow is also dependent on the local country's local laws. In various cases, the available leverage is usually 100:1. Sometimes in the United States, the leverage level can offer up to 50:1 just as the US commodity Future Trading Commission set it in 2010.
The Forex traders use Leverages to magnify their profits during Forex traders; however, these leverages are associated with various risks. Leverages can also magnify losses resulting in a Forex trader losing the entire amount deposited.
To mitigate these risks, a trader should implement various strict trading styles and strategies in orders to mitigate the occurrence of the potential loss. A trader can implement the stop-loss orders to control the occurrence of the potential loss.
A stop-loss will help the Forex trader and the Broker exit a position at a specific price level. It is one of the ways in which the Forex traders can be able to cap the losses in a trade.