When a forex trader or financial expert begins to explain forex leverage to beginners, most people find it a little too complicated. Forex leverage, also known as trading leverage, is one of the most divisive investment tools, and for good reason. When it comes to foreign exchange trading, leverage is frequently misunderstood and misused, giving new traders a bad first impression. If you’ve been bitten once, you’ve been bitten twice.
Because of the low leverage, many newbie traders face constant margin calls in the first month. They lose motivation and confidence and give up, deciding that forex trading is too difficult or impossible to profit from. Both of these assertions are false inaccurate.
Trading appears to be overly complicated at first, but then again, so does almost anything of great value or potential. Learning how to use a forex trading platform and keeping your margin and leverage in check can be difficult, but after a few hours of practise each day, you’ll find that the fundamentals of trading are not difficult at all. Starting with the Exness demo account is a great way to see how leverage affects margin. It’s a great way to experiment with various leverage settings and see how your margin decreases as leverage increases.
How leverage affects margin
Margin is a protective line set up by your broker to ensure you don’t lose more money than you put in. If you make a bad investment, which is likely to happen, your leveraged investment will drain your trading account. When your funds get low, the broker will send you a margin call, asking you to deposit more money. You are not obligated to add more funds if you do not wish to. You can simply manually close the order and accept the loss. Otherwise, when you reach margin and zero funds, the software will automatically stop your losing trade.
Yes, forex leverage trading has never been easier than it is now. but before you can start thinking about your account balance, you need to figure out your preferred trading leverage ratio.
Low-margin high-leverage, according to some traders, is a gift that can help low-budget traders break into the big leagues. Others claim it’s pure evil, blaming it for the deaths of the majority of newbie traders. Let’s get to the bottom of this conundrum and see if low-margin high-leverage is a trader’s best friend or a risky way to blow your budget.
Forex leverage for beginners
When you open a trading account, you’ll usually be asked how much leverage you want to use. But, what exactly is forex leverage, and how does it impact margin? First, let’s discuss what it isn’t. It isn’t a loan at all. New and small brokers used to describe leverage as an interest-free loan that allowed them to open a large position without having to make a large deposit. That is only partially correct.
Using a trading example is the best way to explain forex leverage. We will not have a spread and will skip the Ask/Bid calculation to keep things simple.
Trading without Leverage
The leverage ratio is set to 1 leverage or 1:1 in this example. To put it another way, there is no leverage. Assume a trader has $100 in his forex trading account and is willing to put it all on the line.
At the price of 1.0000, the trader purchases a $100 CFD of ABCXYZ (without forex leverage).
The value of the contract increases to $102.00 when the price of ABCXYZ rises to 1.0200. A $2 profit on a rolling basis.
1 Leverage (1:1) means that your investment positions will not increase. This implies that a larger deposit is required to gain access to higher profit potential. It also means that a significant change in the forex market will not wipe out your entire account balance as quickly. The benefits and drawbacks of one leverage are obvious.
Trading with Leverage
Let’s see what happens if we include leverage in the trade. Another trader makes the exact same trade at the same time, but with a leverage of 1:50.
She put $100 on the line. Exactly the same, but thanks to forex leverage, her open position was multiplied to $5000.
Similarly, the price rose to 1.0200, increasing the leveraged $5000 open position’s value to $5100. The leveraged position generates a profit of $100.
The amount of money at risk in both cases was $100, but the profit in the second case was fifty times greater due to leverage. So, what’s the snag?
The thing about forex leverage nobody likes to talk about
Let’s change the example above to show the dangers of forex leverage. This time, the price of ABCXYZ will decrease.
The price of XYZABC falls to 0.9800 for the trader without leverage, but he is unconcerned. His unfulfilled order is still valued at $98.00.
Our leveraged trader, on the other hand, places the same $100 order with 1:50 leverage. The market position of the order is $5000. When the ABCXYZ price drops to 0.9800, the leveraged position quickly loses value, falling to $4900. There was a $100 loss. The trader lost his entire $100 investment in a short period of time due to forex leverage.
If your trading account is well funded, you can ride out temporary fluctuations, especially if your leverage is low. But if the price goes the wrong way big time, you can lose everything in minutes.
The best forex leverage for trading asset types
Personal preferences exist among forex traders as to which assets are better investments. Traders who use a risk management system typically keep their leverage ratio low. Risk management is simply a set of rules that you follow on a daily basis to limit how you invest. The majority of forex traders agree that consistency is crucial, and risk management is advised.
However, some assets in the foreign exchange market have extremely high trading volumes, which tends to keep daily price movements to a minimum. Others have a low liquidity level and react quickly. Let’s take a look at the more popular one and see which one offers the best leverage for $100.
Major currency pairs
A major currency pair will always include the US dollar. The EURUSD (Euro against the US Dollar) is by far the most traded asset in the world, with the highest trading volume from traders all over the world. If a large investor decides to sell their EURUSD, the pair’s volume and value will drop, causing the price to fall. However, because EURUSD is so heavily traded, the selloff represents a small portion of the total volume, so the price will only fall slightly.
So, what is the best forex leverage for a beginner trading EURUSD?
Low price movement means low profits and losses. If you want to trade just for entertainment value, low leverage in forex is always a good idea, but if you are looking for a higher risk/reward then you can choose a higher leverage ratio.
Minor and exotic currency pairs
When it comes to minors and exotics, the best leverage for newcomers is unquestionably low. The risk of losing money when trading these two types of forex pairs is much higher. The risk is amplified by margin requirements and high leverage. Because trading volumes are low compared to major exchanges, large investors can have a significant impact on the market, making prices much more volatile.
Is it a good idea for forex traders to use leverage?
The advantages of forex leverage are enticing. Exness traders can get up to 2000 leverage (1:2000) and even more in some cases.
Based on the trading example above, a price rise of ABCXYZ to 1.0200 with a high-risk leverage of 1:2000 would have resulted in a profit of $4000 from a $100 investment. However, an ABCXYZ slight price drop to 0.9995 would completely wipe out the traders’ funds in seconds.
Stop Loss, Take Profit, and Trailing Stop are strongly recommended when using high leverage in forex on a well-funded trading account to reduce margin calls. Particularly during times of high volatility, such as when major news is released, avoid using high leverage, or wait till the dust has settled.
Exness allows you to open multiple forex trading accounts with a single signup, allowing you to choose the leverage that best suits the symbol you’re looking to trade. Use the free demo account to make a few test trades on low and high volatility pairs. You’ll have a good idea of how much to trade and at what forex leverage once your real account is approved and ready to trade.
For the first few weeks, keep your financial goals modest. Find a happy medium. When your forecasts are correct, you’ll want enough leverage to make interesting profits, but not so much that an unexpected price fluctuation wipes out your margin. Mastery won’t happen overnight and the risk of losing your entire account balance is high in the first few weeks, so be conservative.
It is suggested that you immerse yourself in the world of finance. After the main stories, don’t turn off the news. Even if you don’t understand what the business analysts are saying about the economy, pay attention to what they’re saying. It’s a fantastic way to learn without actively participating.
You can check out Exness Academy’s quality selection of educational videos, and Youtube is brimming with professional traders eager to share their knowledge and experience.
Like riding a bike, driving a car, or playing a new video game, it gets easier with time. What starts as a stressful engagement can become an enjoyable activity that also offers the obvious attraction of being profitable.
Think of it as an exciting hobby that offers great potential in the future. Enjoy the thrill of the win, battle against every loss, and learn every single day. In no time at all you’ll be trading like a pro.
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