Leverage is one of the main benefits of Forex trading. Leverage is applied as borrowed funds from one’s brokerage, which allows one to increase their trading position. Your deposited amount (margin) would then be multiplied by the chosen leverage in order to make larger profits than what would originally be possible with one’s account balance.
Leverage also helps retail traders to finance their assets and many brokerages couldn’t afford to stay in business without it. If you wanted to trade $100,000 with a margin of 1%, you would only have to deposit $1,000 into your trading account. Leverage options often differ based on the brokerage, account type, and size of one’s account balance. Some regulators restrict the leverage to 1:30, while others allow traders to choose a leverage of up to 1:1000.
Choosing a Leverage Option
You shouldn’t choose the highest leverage offered by your broker just because it is available. Oftentimes, leverage is referred to as a double-edged sword, as it can help one to achieve greater profits, or things can go the opposite way. If your trade goes in the wrong direction, leverage can amplify your losses. Good investors limit the leverage they’re using, in combination with strict stop orders and limit orders to have more control over potential losses.
Many brokers offer their highest leverages on Mini/Cent/Standard accounts, which are the most attractive to beginners due to lower deposit requirements. If you’re a beginner, be cautious with this, as it isn’t a great idea to start out with leverage like 1:200 or higher. Trading from a demo account could also be a great way to get a feeling of the leverage you’re most comfortable with. Our research has revealed that many successful investors prefer a leverage of 1:100. In the end, the choice comes down to personal preference and one’s trading style.
Leverage is an effective tool when used correctly, as it will allow smart traders to multiply their profits; however, traders always need to use caution and place stop and limit orders. Choosing leverage that is suitable for one’s skill level is another must, otherwise, beginners could quickly deplete their accounts. You’ll also need to keep margin requirements and the choices offered by your broker in mind, as these might affect your options. Once you’ve learned how to use leverage effectively, it will become a helpful tool in your trading arsenal.