How to Use Forex Leverage: Ultimate Guide

The Forex market is by far the most active and most liquid financial market on Earth. To be successful in the Forex market, it’s crucial to place the right trade at the right time. Successful traders know that when it comes to forex trading, leverage is an important factor. While it seems incredible that people are drawn to the Forex market for its leverage, making sure you pick the right Forex leverage is extremely important, as it is a double-edged sword that can adversely affect your profits. 

For forex beginners, navigating the markets can be difficult, particularly when managing limited capital or starting trading with small funds. Leverage offers a valuable opportunity to increase exposure and lot size but it can trigger major losses which is something that should not be taken lightly or used irresponsibly. Therefore, we always recommend studying the leverage level based on a proper investment plan and money management aspects. Remember it is always essential for traders to learn how to utilize the trading condition including the leverage, spread, and margins in strategic and responsible ways at all times.

What is Forex Leverage?

In the trading world, the main question is “what is the forex leverage?” which refers to understanding the use of borrowed money (capital) to finance your trade. The forex brokers offer leverage as a financial feature to their customers to allow traders to borrow money for their trades. While this enables traders to trade with bigger amounts which increases their profits, leverage will also increase the downside risk associated with a losing trade.

Leverage is applicable to different financial products such as CFDs, Stocks, Cryptocurrencies, and Forex.

What is Leverage Ratio?

The leverage ratio pertains to the proportion of funds borrowed by a forex trader from their broker relative to their own investment funds in a trade. It is presented in a ratio format, such as 100:1 or 200:1, and denotes the highest possible leverage that the broker can offer. Through leverage, a trader can handle a larger trade size using less capital, thus increasing their potential profit.

For instance, if a forex trader employs a forex leverage ratio of 100:1, they can command a position worth $100,000 using only $1,000 of their own funds. The forex broker supplies the trader with the remaining $99,000 to cover the leveraged portion of the trade.

Forex leverage ratios of 50:1, 100:1, 200:1, and 400:1 are some of the most common:

• 50:1: With 50:1 leverage, you can place a trade worth up to $50 for every $1 available in your account. So, if you deposit $500, you can trade amounts up to $25,000.
• 100:1: With 100:1 leverage, you can trade up to $100 for every $1 in your account. This leverage ratio is commonly offered on a forex standard account, where a minimum deposit of $2,000 would allow you to control up to $200,000 in trades. This can increase further with the forex cent account.
• 200:1: A leverage of 200:1 implies that you can trade up to $200 for every $1 in your account. This ratio is commonly offered on mini-lot accounts, which typically require a minimum deposit of approximately $300. With this amount, you can trade up to $60,000.
• 400:1: When you have 400:1 leverage in your forex account, it means that for every $1 you have, you can place a trade worth $400. While certain brokers allow this leverage on mini-lot accounts, it’s important to be cautious of brokers offering this type of leverage for small accounts. If someone deposits $300 and attempts to trade with 400:1 leverage, they could lose all their funds in just a few minutes. Even a single losing trade of $300 at this ratio could result in a loss of $120,000.

With AximTrade, you can leverage up to 1:3000 for the Standard account, 1:2000 for the CENT account, 1:1000 for the ECN account, and 1:∞ on the Infinite leverage account. Here’s how to choose the best forex account that’s best suited to your needs in terms of forex leverage and spread!

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How to Use Forex Leverage to your advantage?

Leverage adds excitement to forex trading and allows almost everyone to trade no matter how small their fund is. Accessibility is considered the main advantage of using forex leverage. In other words, most beginners with small amounts to invest can easily trade forex due to the high leverage provided by brokers. Yet, this big advantage allows major losses when the beginner increases the leverage so high. Professional traders tend to be realistic with the leverage and trade with leverage that they can manage. However, let’s explain more about the leverage advantages first.

In Forex, leveraged trading can also be called margin trading, as the margin is the amount of money needed as a good faith deposit in order to open a new trade with your account. The $1000 in your 1:1000 leverage account is your margin. Margin requirements may vary depending on the size of your trade.

The following are some of the benefits of forex leverage for a beginner trader:

1. Good chance of making huge profits:

Forex traders can earn substantial profits with a small investment by using leverage. Due to leverage, even traders with limited funds can trade with significant amounts of money, allowing them to take on a larger position in the market with a relatively small amount of capital.

Trading in the Forex market with a $1000 account balance, for example, gives you access to $50,000 or $100,000 using a leverage ratio of 1:50 or 1:100. This means that the trader is only risking $1,000, but if their trade is profitable and opened at 100% margin with leverage of 1:100, they could earn $100,000.

2. Increased return on capital:

Forex leverage enables traders to control a larger position with less capital, improving capital efficiency. Assume you have $1000 in your account and decide to use a leverage of 1:100. In this case, you will have access to $100,000 to manage. This allows you to open more trades across a wider range of trading instruments and use forex hedging techniques to mitigate risk.

3. Entry-level requirements are low:

For novice traders, Forex leverage can have both advantages and risks. By using leverage, traders can control substantial positions with a relatively low amount of capital, potentially increasing their profits. For example, if a trader has a leverage ratio of 1:100, they can use $1,000 to control a position worth $100,000.

Without leverage, a trader with $1,000 would not be able to open even the smallest position on popular Forex pairs like EUR/USD, as one lot is typically 100,000 currency units. This means that to open a minimum position on EUR/USD, a trader would need at least $1,174.70. However, leveraging allows traders with small deposits of $50 to $100 to access Forex trading and trade on par with experienced professionals. Nonetheless, it’s important to remember that leveraging can also lead to significant losses if used carelessly.

4. Favorable monetary conditions:

Currently, there is intense competition among Forex brokers, as they strive to attract clients with small deposits and low commissions by offering substantial leverage. Leveraging your trades while trading intraday involves minimal costs. 

However, if you keep a trade overnight, you must consider the broker’s overnight commission, commonly referred to as SWAP. Traders who are willing to take risks can potentially increase their deposits by a significant margin, ranging from 300-500% per month, surpassing the profits earned by banks. You can reduce your Forex trading costs by reading on.

5. Capital Protection:

You may have encountered the term “Margin Call,” which can instill fear in many traders. However, it is essential to understand that this feature is designed to protect your funds.

Forex traders receive a margin call when their trading positions become negative, indicating that they must deposit additional funds into their trading accounts or close losing trades to release margin. This notification is typically issued when the margin falls below a specific level set by the broker, usually 60%, indicating that the account’s funds no longer fulfill the margin requirements.

When the margin level drops below 30%, the broker will trigger a stop-out, which automatically closes the positions until the preceding level is restored. Check out the way Margin call and Leverage operates!

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How to Choose the Right Forex Leverage?

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.  

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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. 

In forex trading, there are three basic trade sizes: Standard lot (100,000 units of the quote currency), the Mini lot (10,000 units of the base currency), and Micro lot (1,000 units of quote currency). Price fluctuations are measured in pip movements, and the pip value depends on the lot size.

Assuming the trader purchased 5 standard lots in USD, a single pip movement would earn the trader $50. Likewise, if the trade fails, the trader loses 50 pips, i.e., 50 pips x $50 = $2,500. That’s 25% of the $10,000 account.

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.

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Disadvantages of Using Forex Leverage:

Although there can be significant profits, leveraging also has a downside. Therefore, novice traders must be mindful of the drawbacks associated with forex leverage. Now, let’s examine them in detail.

1. Deposits are at high risk of loss:

When a trader utilizes high leverage, they can fall into a psychological trap where they feel they have a surplus of free money that needs to be invested. It’s crucial for beginners to understand that leverage not only provides additional opportunities but also creates obligations. 

One of the most important obligations is covering losses with your own funds to prevent Stop Out. This risk arises because, with high leverage, you can open positions that are hundreds of times larger than your actual funds, which can lead to significant losses in your balance. This is especially dangerous when multiple large positions are open simultaneously since a loss in one trade can decrease your account level for all other open positions and increase the risk of Stop Out in those trades. 

Essentially, misusing free margin can cause your entire structure of positions to collapse like a house of cards, resulting in the depletion of your deposit. For more information, refer to this detailed description with examples.

2. Recovering the deposit is very difficult:

As previously mentioned, employing high leverage on your balance can result in significant losses. Novice traders often make the mistake of assuming that larger leverage will make it easier to regain lost funds. However, it’s important to understand that to recover from losses, your profitability must be exponentially higher. 

For instance, if you experience a 50% loss with a balance of 100 USD, you will need to generate a profit of 100% from a remaining balance of 50 USD just to break even.

It’s crucial to always bear in mind that choosing to use low, medium, or maximum leverage in Forex is a decision that comes with its own set of responsibilities. Regardless of the outcome of your trades, the trader must bear the cost of the forex leverage in the form of a swap, which will be automatically deducted from their account balance.

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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. This is a fatal mistake!

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 favor, they have to bear higher losses, resulting in less margin for their next trade. Make sure you learn the best tips on how to avoid losing money in trading.

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 earn more money from your trades and helps you achieve financial stability.

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How to use leverage in Day Trading?

Day trading and leverage are likely to go hand in hand. Leverage enables day traders to execute trades and earn maximum profits as the day unfolds. However, it isn’t as easy as it seems. Because in day trading, you can’t predict what’s going to happen next. It seems like a trend is going your way, and then it suddenly changes the downtrend.

As day trading involves opening multiple or a single position in one day, using forex leverage tends to magnify both your gains and losses. Being smart and attentive to adjust your trade-in relative to currency fluctuations is crucial. Setting a stop-loss order can help reduce your trading losses.

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Best Leverage for a $100 Forex Account

If you are a trader with a balance of $100, you can start with a leverage level of 1:100, as many professional traders recommend this leverage ratio. Trading with 1:100 leverage, you will have a trading capital of $10,000 to open forex currency transactions with 100:1 leverage; your broker provides you 100 dollars for every dollar you have in your forex account.

One good example is to learn more about how to trade Forex with $100 if you want to explore trading more with small funds.

With the forex leverage of 1:100, your broker gives you $100 for every $1 you trade. In simple terms, if your trading balance is $100, then you can trade $10,000 ($100*100). But before you begin trading, you need to manage your risks properly to ensure you do not blow your trading balance.

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Trade with the best leverage levels in the market at AximTrade 

Take advantage of the best leverage levels in the Forex market from AximTrade ranging from 1:1000, 1:2000, 1:3000, and up to Infinite leverage. Open your forex account now in easy steps to enjoy premium trading services and get access to advanced trading features with minimum deposit requirements.

The advantage of using AximTrade’s leverage is that you can make significant profits with very little investment. Start investing with a small amount of capital in a CENT account and benefit from the maximum leverage of 1:2000. 

The Infinite leverage account from AximTrade takes traders to new heights by giving them access to an unlimited amount of trading capital. This one-of-a-kind forex account type helps traders achieve their full trading potential by engaging in larger trades with borrowed funds.   

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How to Use Forex Leverage: FAQ

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