The foreign exchange, FX, or Forex market is one of the top places for the largest and most liquid assets in the world. One of the biggest factors that played into this success is leverage. Let’s see what is the best leverage.
High risks often lead to high rewards, but sometimes it pays to play safe. Do you want to keep learning about leverage? Check out this guide to leverage for beginners to expand your knowledge some more. Also, continue reading for more valuable info about leverage in Forex trading.
What Leverage Means in Forex Trading
In Forex trading, leverage is a type of funding used to improve their position. Their leverage increases their position by increasing their funds beyond what they have in their balance. You can look at leverage like it’s a loan for traders.
You can also look at it as a tool used to control larger dollar amounts in a trade. Even if you have a small deposit, you can participate in trades that go past your typical margin.
How Leverage Works in Forex Trading
First, decide on a leverage ratio. We will discuss the principle behind the leverage ratio in more detail below. You’ll have an initial margin. This is how much money you have in your balance account.
When you apply your leverage from a broker, you give them the cash that you have as a deposit to the leverage. In return, you’ll get an expanded margin or cash balance.
Let’s say you’re a Forex trader, and you have $100. Your leverage equates to $100 for each dollar you have. With this “loan,” you’ll have $10,000 to use for trading. Once your trade is made, you return the loan amount. The rest of the profit you get from that trade is yours.
This is one way to look at leverage. Another way to look at it is as a way to increase your margin. For example, you have $1,000, and you use a leverage of 1:100. The leverage will increase your $1,000 to $100,000, allowing you to make deals with this larger amount.
Let’s say you invested your $1,000 in EUR/USD. The rate moved up 100 pips from 1.1305 to 1.1405. In this trade, you’d only make $10. However, if you use the 1:100 leverage, your $10 profit will increase to $1,000.
Where to Get Leverage in Forex Trading
Brokers will provide the borrowed funds or loan that is your leverage. If you want to get leverage, look for brokerage accounts or brokers. As a tip, be thorough when you look for an online broker.
Ideally, you want a broker that can offer the lowest or no brokerage. You also want your broker to have a higher margin. A sign of a good broker is that they receive excellent customer services, provide research reports, and use free trading platforms. You also want to make sure they’ve got the proper licenses and regulations.
What Is Leverage Ratio?
When Forex traders talk about leverage, they’re often referring to leverage ratio. This is the ratio we talked about in our earlier examples (1:100). This number shows how much the trade size will get magnified.
Let’s say you get a leverage ratio of 1:30. This means your broker will give you $30 for every $1 that you have. If you initially had $100, you’ll get $3,000 once you have leverage.
What Is the Best Leverage Ratio?
Brokers offer many types of leverage ratios. You’ll see numbers like 1:100, 1:200, and even up to 1:1000. If you want to pick the best leverage, look back at the capital that you’ve got. Remember, the best leverage will always depend on your capital.
In general, the best leverage ratio is 1:100 to 1:200. The bigger the ratio, the larger your gains. However, this also opens you to large losses if your trade fails or spirals. Remember, the higher your leverage ratio, the riskier it is, as well.
You should also consider your experience and knowledge in trading. Many professional traders use the leverage 1:100. If you’re not at their level yet, it’s always better to use lower leverage ratios. This way, you play it safe. You won’t suffer huge losses when your trade fails, but you also limit how much you can get if it succeeds.
The Best Leverage Ratio for Beginners
If you are still new to Forex trading, you may want to play safe and use a leverage ratio of 1:1. If you want to be a little more adventurous, try 1:10 leverage with a $10,000 balance. Trading with very high leverage ratios right away is a very common and terrible mistake that many new traders make.
Let the leverage increase as you learn more about Forex trading. Never rush into it, especially since large leverages are risky. Remember, it takes months or even years to learn the trade.
With that said, we hope you now have a better understanding of leverage. We hope you enjoyed learning about leverage with us. For more guides related to topics like this, see our other posts now.