Do you know why forex trading is popular among traders compared to other markets? Is the probability of using high leverage? Trading leverage is the use of borrowed capital to get a much higher potential return on the investment. Investors take advantage of trading leverage for higher returns in forex trading. Trading leverage increases profit several times and can lead to big losses.*
Traders who are beginners think about whether they should use trading leverage for forex trading and which level of forex leverage should be chosen for safety and, at the same time, profitable forex trading. However, the definitive answer to this is still being determined. Analysts have researched to find successful traders using trading leverage and the best level of trading leverage for forex trading.
The trading leverage uses borrowed funds to increase the trading position beyond what is available from cash balance in Forex trading. Traders use trading leverage to perform well by accepting the risk of losses from relatively small price changes in currency pairs in forex trading. Choosing the right amount of leverage is the key risk determination for traders. In forex trading, leverage can be 50:1 to 100:1 or even more.
Now let us discuss what is the leverage ratio in forex trading. Forex trading leverage ratio is described as 1:100 or 100x, where the number implies the trader's account balance or the margin collateral multiplier. This ratio shows the relationship between traders' capital and the portfolio's total value of the forex position.**
Considering the leverage ratio when trading with a leverage level is equally important. It makes it easy to understand how much money is needed to open a certain position. Also, it helps understand how much the trader risks in each trade.
What Is The Margin In Forex?
Margin is the minimum sum of money that a trader needs in his account to keep a leveraged trading position. Margin is also said to be the funds kept aside by the broker so that investors can make trades. Brokers define margin as a percentage of the full amount of the trade. Let us see some terms related to margin in the Leverage ratio.
- Required margin / used margin - Required margin is the amount needed to keep the current trading positions open. The broker locks up the amount until the positions close.
- Available margin / available equity - Available margin is the funds available in the account to open future positions. Funds refer to those which are not used yet.
- Level of Margin - Margin level means the margin available or fund available represented in percentage form.
- Margin Call - Margin call is when the margin level decreases or falls below the determined value. To avoid a margin call, traders should always manage their margin level.
No forex trader can afford to ignore the margin level. Every investor must regularly monitor their Forex margin level to avoid any margin calls. Traders can also check their trading account and have details handy.
High Trading Leverage Risk
Trading leverage is a process in which the investor borrows money to purchase something or for forex trading. For forex trading, capital is acquired from brokers. Forex traders can borrow a significant amount of capital on initial margin requirements and gain more from successful trading. Earlier, many brokers, like TradeEU, were able to offer significant-high leverage ratios.
It is said that high leverage means high risk. Yes, that is partially correct, but using high leverage results in high margin requirements, and the account equity either goes up or down. My recommendation would be not to leverage in Forex trading. It is exciting and seems like money is coming in, but it is risky at the same time.
Bigger positions are like the sooner they come, the sooner they may go. Bigger positions are more prone to slippages. Always investigate high trading leverage before forex trading.
How To Choose The Right Leverage Level?
Every investor needs to know how to choose the right leverage level before forex trading. There are certain rules which investors should review before selecting the leverage level. Out of many, the most important 3 rules are:
- Always maintain low levels of leverage
- Investors can use trailing stops to reduce the downside and protect their capital.
- Investors should limit capital to 1-2% out of total trading capital on each position.***
Investors who do Forex trading should choose the level of leverage that makes them most comfortable. Investors who are beginners or the ones who don't like taking huge risks or are still a learner in Forex trading should choose low-level leverage like 5:1 or 10:1 should be appropriate for them.
Stopping the limit or trailing stops helps investors reduce their losses when any trade goes in the wrong direction. With the usage of limit stops, investors are sure that they can learn how to trade currencies while limiting the potential losses if the trade fails. Trailing stops are important because they help in reducing the emotion of trading among investors and allow traders to pull themselves away from their trading desks without any emotion or feeling.
Benefits Of Trading Leverage
Now we have seen how to choose the right leverage level and what leverage is. Let's now see the benefits of Trading leverage in Forex trading.****
- Trading leverage helps in increasing profitability by opening large positions.
- For traders, the usage of leverage is free.
- The large positions are opened without making any large deposits for investors.
- High-leverage methods use a large number of trading instruments.
- Investors can also apply different trading strategies in Forex trading.
Disadvantages Of Trading Leverage
Using high leverage is good for higher returns, but at the same time, it is risky too. Traders can also lose their money, leading to trauma for anyone who loses a huge amount. There are certain drawbacks of using leverage, which I have listed below for you.
- There is a possibility of a huge loss of the entire deposit if the price moves opposite from the position it opened in the market.
- The margin requirements for using leverage may force a trader to increase their equity or close a position, which is not preferable.
- When high leverage is used, it is impossible to set stop loss at an appropriate level.
- The expenses on the transaction may harm the trader's deposit if the trader uses high leverage.
As we said, the biggest advantage of Leverage trading can be the biggest drawback in leverage trading. This is because the higher the actual leverage, the more impact will be on the final results of the transaction. The final result can be profit or loss, depending on the market. Leverage has an equal impact on the profit and loss, and it proportionally increases or reduces these values depending on the level of leverage chosen by the investor and is used.
Forex Leverage For Beginners
Forex market leverage is a key attraction and also very important for traders in terms of trading. Following the right leverage level will give profit, and if traders use the wrong leverage level, it may lead to loss. For beginners, it is very important to properly study the leverage levels available for the forex market and then consider how much they can afford.
The key issue for beginners is that they intend to select the highest leverage level. The highest leverage level can be profitable only when the forex trader uses it correctly. Beginners generally misinterpret that a high leverage level will deliver faster and more significant results.
When it doesn't work for beginners, they bear the loss, which may result in losing huge amounts and being left with a lesser margin for future trades. Thus a beginner should choose the leverage level they are more comfortable with and enjoy forex trading.
Online Forex Trading
With the evolution of digitalization, the online forex trading market has grown rapidly. Daily, trillions are traded in the forex market. Beginners and experienced traders both trade online freely and try to earn more and more profit by accepting the risk of losses. Many platforms provide demos, offer free trade options at low cost, and are user-friendly. Forex trading has grown extensively and among youngsters too.
Forex trading gives opportunities to investors around the clock. Forex trading has many benefits like low commission, Leverage opportunity, Liquidity, Diversity of eight major global currencies, and Accessibility of the forex market. These factors make the forex market fully competitive.
Liquidity allows the market to respond to changing market conditions in real time. There are plenty of trading platforms from which investors need to choose the right fit. The platform with a simple user interface or built-in features is simple. Investors should remember that everyone can choose a different best-fit platform for them; it may vary from individual to individual.
The Bottom Line
With experience, a trader learns how to select the right forex leverage level considering the risk tolerance and comfort when dealing in the global currency market. Beginners in the trading field should familiarise themselves with the terminologies, learn trading tricks, and gain experience. The proper way to manage leverage level is by keeping positions small, using trailing stops, limiting the amount of capital, and many more.
 **This financial information has been quoted from Investopedia
 ***This financial information has been quoted from Forex Time
 ****This financial information has been quoted from Traders Union
5 *****This information has been quoted from HellaGood.Marketing