Forex traders use different leverage levels based on their trading strategies and their ability to anticipate market movements. Usually, short-term traders like scalpers and day traders tend to trade with high leverage since they usually look for price changes within a short period. By contrast, long-term traders typically use low levels of leverage.
Here’s how to Choose the Right Forex Leverage
Regardless of how attractive leverage may seem, you should always keep in mind that excessive leverage can wipe out your entire starting capital in a matter of seconds. Leverage is directly related to the equity of your forex trading account.
Let’s assume you are trading a currency pair with $100 and you are not using leverage. You can achieve the following results:
With an increase of $10, you get a profit of $10.
If the trade falls by $10, you will suffer a loss of $10.
When you apply 1:100 leverage, you get different results:
With an increase of $10, you get a profit of $100.
If the trade falls by $10, you will suffer a loss of $100.
The greater your leverage, the more volatile your account equity will be. Likewise, lesser leverage means less volatile your account equity will be.
Example using High Leverage:
Let’s say that Trader A has a $10,000 cash account. He decides to use the leverage of 1:50, which means he can trade up to $500,000. In forex terms, that’s 5 standard lots.
Example using Low Leverage:
Here’s what Trader B did. Instead of using the maximum leverage of 1:50, he used a conservative leverage ratio of 1:5. If Trader B has $10,000 in cash, they can trade $50,000 in currency. A mini-lot is equal to 10,000 units of currency, and each pip is worth $1. As Trader B has 5 mini lots, each pip movement could earn him $5.
In case the investment fell by the same amount, by 50 pips, then the trader would lose 50 pips x $5 = $250, which is just 2.5% of the total position.
What is The Best Forex leverage for Beginners?
Leverage is undoubtedly one of the key attractions of the forex market. The major issue here is that most beginner traders intend to select the highest possible leverage. The truth is that higher leverage can be profitable only when it is used correctly. New traders are more likely to give in to the misconception that higher leverage will deliver faster and more significant results. As a result, when a position does not work out in their favour, they have to bear higher losses, resulting in less margin for their next trade.
Beginner traders should only select the level of leverage they feel most comfortable with. A lower level of leverage, such as 1:10 or 1:50, may be more appropriate if you are conservative and don’t like taking risks. Choosing the right forex leverage level allows you to grow your Forex account and help you achieve financial stability.
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