In the financial industry, entrepreneurs and investors use different strategies and tools to achieve their goals. A common and useful tool is to leverage. Leverage is when people who wish to make improvements to their business or invest on the market but don’t have the funding, as a loan to a bank entity. This loan increases the capital of those people, and they use it to make their plans. Find out how to use leverage like a pro.
Tip 1 – Forex leverage for beginners master tip: The higher the Leverage the higher the RISK.
Leverage in Forex trading has many exciting benefits and allows the investors more significant opportunities on the market, although it also comes with its downsides.
Before you decide if Forex leverage is something for you, it is best to know how it works, and if it is what you need to become a successful trader. Here are some tips and recommendations on Forex leverage for beginners.
Leverage In The Forex Market
As mentioned before, leverage in the financial industry means that an investor or a company borrows money from an entity to increase the capital and invest in improvements and stocks.
When the leverage is for foreign exchange, the outcome that the investors are looking for is to benefit from currency rates between countries. Forex trading is one of the easiest to understand and more profitable markets, but also is one of the riskiest, which is perfect for those who are starting in trading.
On Forex leverage, usually, the money is loaned by brokers. In this case, the investor has to open a margin account with the selected broker.
The most common leverage that Forex traders use are 50:1, 100:1, and 200:1; although some more experienced traders can trade with a leverage ratio of 400:1 or more.
A 100:1 leverage ratio means that the trader must have at least 1% of the amount that is going to borrow from the broker on the margin account.
Forex leverage for beginners, it is recommended to never use all the money inside the margin account in one transaction, unless there is minimum risk and they feel safe with the trade. The most a trader should risk is 3% of the margin account.
Tip 2 – Again, Forex leverage for beginners master tip: The higher the Leverage the higher the RISK.
Forex Brokers With High Leverage
|Broker Type||Market Maker|
|Regulations||IFSC, CySec, ASIC|
|Account Base Currency||USD, EUR, GBP, JPY, CHF, AUD, RUB, PLN, HUF, SGD, ZAR|
|Max Leverage||888:1. *Leverage depends on the entity of the group and the financial instrument traded.|
|Trading Platforms||Metatrader 4/5, Webtrader|
|Regulations||FSCL and FSPR|
|Account Base Currency||USD EUR GBP AUD NZD SGD CAD JYP ZAR|
|Trading Platforms||Metatrader 4|
|Account Base Currency||USD, EUR|
|Trading Platforms||Metatrader 4/5, Webtrader|
How to use leverage with Forex trading
In forex trading, the highs and lows of the trades are evaluated in pips. Pips are the smallest denomination in currency trades; so, depending on the number of pips and the amount invested by the trader, you can see your possible gains and losses in the market.
An example: A trader creates a margin account with a broker, with a forex leverage ratio of 100:1, and deposits $1000 of capital to open it. In this case, it would mean that the amount in the margin account would be about $100,000, and the trader would have access to that money for the trades he wishes to do.
The trader invests that amount in the market, investing in 10 mini lots (0.10 lots) of USD/EUR and waits. If every pip is equal to $1, and it raises 20 pips, the trader would see $20 of profit for every mini lor on the currency pair being traded.
However, this also can go against you. If the pip goes down 20 pips, the trader will experience a loss of $20 (20 pips at $1 a pip). Still, this loss is less than the 3% of the amount of his margin account so that he could afford that number on the losses.
Tip 3 – Never trade more than you can’t afford to lose.
Benefits of Forex Leverage
Traders that use Forex leverage can obtain significant profits if they know how to use and take advantage of the best trades.
The only benefit to higher leverage is the potential of higher profits at the expense of much higher risk. If used wisely it can be of great benefit, at the expense of RISK.
The downside of Forex leverage
The great benefits of using forex leverage also involve considerable risk.
New traders can easily get lost in this matter. Especially if they are lucky in the first trades and gain high amounts of money by investing with high leverage and larger lots. If the trader is not careful, the trade can go down at any moment and risk draining your account to zero in some cases. Although trading is not gambling, it shares some of its characteristics, one of them being that new traders follow their emotions and don’t rationalize.
Traders shouldn’t forget that investing in Forex comes with risks, and these risks are higher depending on the amount of money they put on a currency pair.
Tip 4 – Recommend new traders first trade with no more than 50:1 leverage.
Forex leverage for beginners - Helpful Tips
If you are starting in the foreign exchange market, you should consider first if you are prepared to use Forex leverage as a tool.
It can be advantageous if you don’t have enough money to make specific large trades. It can also be a faster way to increment your capital and reach higher profits in less time.
However, if you wish to minimize the margin of risks, you should be very careful before making the trade and try to be as sure as you can about the possible result that it will have.
– It is essential to keep track of the currencies in which you wish to invest. If you want to know how the market is going to react, the best way is to follow the news related to the countries where that currency moves. See if there are changes in their economy or notifications from the Central Banks. With this information, it is easier to know if a currency rate will go up or down.
– Start your trades with currencies that are familiar to you or the Major pairs, such as EUR/USD, USD/CAD
– Ask for advice from your broker, they know the market better than you and can give you tips on where to start and how much you should.
– You shouldn’t use all the amount in your margin account in one transaction unless you are entirely comfortable with losing a huge portion of your account balance. Although Forex trading is one of the most open markets, sudden changes in the global economy can affect the market and change the direction of a specific currency pair. It is best to start with small amounts until you feel confident in trading.
Forex Leverage provides a way to raise your capital faster, being able to invest higher amounts of money and gain more profits but at the same time substantially increases your losses if the market goes against your trade. Big wins can also become significant losses.
With enough preparation and investigation, Forex leverage can give great benefit for traders, new and old. As beginners, it is best that you start with small amounts of money when trading. Always remember one thing: The higher the Leverage the higher the RISK.