Forex leverage, or trading with borrowed money, is one of the main attractions of the forex market. In forex trading, you get much higher leverage than in stock trading. With leverage, you only need an initial margin or a small capital in your account to open large positions. The forex leverage of 100:1 is common in the foreign exchange market, which means that you can trade a value of $100 for every $1 in your account. In other words, with a leverage ratio of 1:100, you can trade 100 times the value in your account.
The forex leverage is a highly valuable tool for beginner traders as they can use it to their advantage and greatly increase their profit provided they use it intelligently. In this article, we will discuss why forex leverage is highly valuable for beginners and how beginner forex traders can use leverage to their advantage.
Pros of forex leverage for beginners
1- As mentioned earlier, beginner forex traders who don’t have large capital can use leverage to make large trades. Traders only have to deposit an initial margin, a small percentage of total trade value, to initiate a trade.
2- The forex leverage allows you to trade using borrowed money from a broker. However, you don’t have to pay interest charges on leverage, which makes using leverage a profitable and inexpensive proposition.
3- Because you can make large trades with the forex leverage or borrowed money, you have the potential to significantly magnify your gains in case you make a profitable trade. The magnified returns are not possible if you only use your own money in your trading account.
How beginner forex traders can use leverage to their advantage?
Leverage is a double-edged sword, which means that a high-leveraged trade can quickly deplete your trading account should a trade go terribly wrong. Leverage amplifies your gains as well as losses, so you should be careful while using leverage in order to gain an advantage. Beginner traders should use the following strategies while using leverage to gain the maximum advantage of the leverage.
1- Limit your losses
When using leverage, you must limit your losses and ensure that your winners are greater than the losing trades. One big loss can eliminate a series of gains, so managing your trade and keeping it within the tolerable loss limits is critical to your success as a trader.
2- Set stop-loss
While using leverage, you must set a stop-loss on each of your trades so that you don’t lose more than a certain percentage of your account on a single trade. Stop-loss ensures that you are not carried away by your emotions during trade as leverage would significantly magnify the outcome of the trade and you would be emotionally attached to the trade. A stop-loss point would ensure that you are taken out of the trade the moment it moves against you, limiting your losses and securing your trading account.
3- Use appropriate leverage level
Your forex broker might offer you higher leverage such as 1:100, but you don’t necessarily have to avail the maximum leverage limit. You should avail the appropriate level of leverage that suits your risk-return objective and your trading strategy. When the market is highly volatile, you should keep your leverage level at a minimum and vice versa.
4- Use appropriate trade size
When you use high forex leverage, your trade size can be too big to handle comfortably, and you might even risk losing your account as a small change in the market can have a significant impact on your trading account. To effectively manage your trade, you should choose the appropriate trade size along with the appropriate leverage level so that you are able to manage your trade comfortably.
Forex leverage, when used appropriately, can do wonders for beginners. Beginner traders can enter forex trading with little capital and use leverage to execute their trades. However, leverage can quickly devour new traders’ accounts if they are not careful about using leverage. By following the strategies we mentioned above, beginner traders can improve their trading and use forex leverage to their advantage.
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