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.
As a beginner in forex trading, it can be challenging to trade with a small trading balance. By making use of the right Forex leverage, you can increase your trading capacity with less capital. Leverage allows traders to get a greater stake in the Forex market than their investment capitals. It is extremely important for all traders to understand the concept of forex leverage and how it should be used responsibly.
What is Forex Leverage?
Leverage refers to the use of borrowed money (capital) to finance an investment or trade which could multiply the potential returns. At the same time, leverage will also multiply the downside risk associated with a losing trade. With leverage, a trader can borrow funds to significantly increase their trading position beyond what they could achieve with their limited amount of trading capital.
Let’s imagine you have $1,000 on your trading account, and you want to open a $100,000 position, which means you are trading 100 times (1:100 leverage) your capital. Leverage is applicable to different financial products such as CFDs, Stocks, Cryptocurrencies, and Forex.
Understand the Role of Leverage in Forex Trading
Leveraged trading is a common strategy in the Forex market as it offers one of the highest amounts of leverage available to traders. Forex leverage enables traders to borrow funds from their brokerage to open bigger trading positions, thereby increasing their chances of profitability.
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.
Leverage adds excitement to forex trading. With leverage, Forex traders are able to gain greater access to the market than they could otherwise afford. However, while leverage increases gains, it also magnifies losses. So, choosing the right Forex leverage is important for long term trading success. If the trading losses erode the margin levels substantially, it can adversely affect their long-term trading careers. Check full AximTrade Review to learn more about the trading conditions and the company regulations. Traders of all types can find a trading option that suits their needs at AximTrade.
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.
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.
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 earn more money from your trades and helps you achieve financial stability.
How to use leverage in Day Trading?
Day trading and leverage are likely to go hand in hand. Leverage enables day traders the opportunity 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 downtrend. As day trading involves opening multiple or a single position in one day, using leverage tends to magnify both your gains and losses.
It’s crucial to be smart and attentive to adjust your trade-in relative to currency fluctuations. Setting a stop-loss order can help reduce your trading losses.
Best Leverage for $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 one dollar you have in your forex account.
With the 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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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.