Forex leverage is a popular trading tool that enables investors to use borrowed funds in order to multiply their investment capacity and increase the rate of potential return. Investing with borrowed funds not only amplifies greater gains but also increases risk exposure.
The Forex Leverage Explained
Leverage is an investment tool of using borrowed capital to maximize an investment’s potential return. It is defined as the ratio of the amount of capital to the required margin. It also gives you the ability to increase your trading capital with a relatively small deposit, the margin.
Trading using leverage is referred to as margin trading; as the amount needed to open and maintain a leveraged trade is called the margin. Forex leverage is applicable on different financial products such as CFDs, stocks, cryptocurrencies and forex.
How Leverage Works in the Forex Market
The leverage technique is very common in forex trading. Investors can trade larger positions by borrowing money from the broker. Leveraging helps maximizing the returns from changes in a currency’s exchange rate.
By using a leverage of 1:100 for instance, every $1 you invest is worth $100, and with your $1000 margin you can open $100,000 lots. For example, if the EUR/USD rate moves up 100 pips from 1.1100 to 1.1200 and you had invested $1000, you would have made $10 on that trade. But, your $10 profit will be magnified to $1000 instead.
Because profits and losses are calculated on the total size of the position, so losses may be exceeding the initial deposit. That’s why leveraged forex trading is a double-edged sword. So, it is important that forex traders know how to manage leverage usage and adopt a strict risk management plan to mitigate potential losses.
Advantages of Leveraged Trading
Now that you understand how leveraged trading works, let’s discuss two major benefits:
Maximizing profits: Using leverage enables you to magnify your potential gains from a relatively small investment capital.
Seizing more opportunities: Leveraging can free up capital for other investment, and so help you to continue gearing investment opportunities.
Disadvantages of Leveraged Trading
Despite the fact that leveraged products provide traders with a range of benefits, it is critical to consider the potential risks as well.
Magnified losses: Forex Leverage magnifies losses as well as profits, and sometimes it is easy to forget the amount of capital you are putting at risk. So, you have to consider potential losses, and follow predefined measures to manage your risk.
Margin calls: If the market moves against you, you may be asked to put up additional funds in to keep your trade open. This is known as margin call. In this case, you’ll either have to add capital or exit positions to reduce your total exposure.
How to Choose the Proper Leverage Level
Choosing the right leverage level depends on considering both profits and losses. If you’re a beginner, try sticking to the following:
- Pick low leverage levels.
- Use stop-loss orders and trailing stops to reduce potential losses and protect your capital.
- Limit you risk exposure to 1% to 2% of total trading capital for each open position.
Remember to choose the level of forex leverage that makes you most comfortable. If you’re in the risk aversion team, or you’re still learning how to trade forex, low leverage levels like 5:1 or 10:1 might be more appropriate for you for now. But if you’re experienced trader with higher risk appetite and clear trading plan, you can go for high leverage levels.
Choosing the proper forex leverage level depends on each trader’s experience, risk tolerance, and comfort. Beginner traders will have to familiarize themselves with leverage and other trading tools before applying any of them. It’s advised to practice on a risk-free demo account first. Remember that using trailing stops, trading small positions, and limiting the amount of risk for each trade is a good way to start learning the adequate way to manage leverage.
AximTrade offers flexible forex leverage for margin trading which allows Standard accounts leverage up to 1:3000 leverage which is one of the top competitive leverage conditions. The flexibility of the leverage allows the clients to trade with a low amount of capital and the ability to access the market. For the Cent account, AximTrade offers 1:2000 while in the ECN account the leverage is up to 1:1000.
Leverage ratio depends on your account type and equity, up to 1:3000. Existing leverage can be reduced by applying custom leverage. AximTrade provides a leverage range that helps you choose your preferred risk level.
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