Whenever a forex trader or financial expert begins to clarify forex leverage for beginners, for most people, it tends to get a little too complicated. One of the most controversial instruments in the investment world is forex leverage or trade leverage, and for good reason. Leverage is often misunderstood and misused, leading to a bad first impression for new traders when trading on foreign exchange. Bitten once, shy twice.
Due to low leverage, many novice traders see constant margin calls in the first month. They lose motivation and trust and never try again, deciding that trading forex is too complicated or without the possibility of profit. The two assumptions are both inaccurate.
In the beginning, trading only seems overly complicated, but then, almost nothing of great value or potential happens. It can be tricky to learn how to use a forex trading platform and keep your margin and leverage balanced, but you will soon realise after a few hours each day that the basics needed to trade are not complicated at all. Starting trading with the Exness demo account is one great way to see how leverage impacts margin. It’s a great way to test various leverage settings and see that when leverage is higher, your margin is lower.
How leverage affects margin
Margin is a protective line developed by the broker to give you the option of not losing more than you’ve invested. Your leverage-multiplied investment will start draining your trading account if you make a bad investment, which happens. You’ll get a margin call from the broker when your funds approach a low level, prompting you to deposit more funds. You don’t have to do that if you don’t want to add more funds. You can simply manually close the order and take the loss. Otherwise, when you reach the margin and hit zero funds, the software will eventually and automatically stop the losing trade.
Yes, forex market leverage trading has never been simpler than it is today, but you need to figure out your preferred trading leverage ratio before you can start thinking about your account balance.
Some traders swear that high-leverage low-margin is a gift that can give a shot at the big time to low-budget traders. Others say it’s pure evil and accountable for most newbie traders’ demise. Let’s get to the bottom of this dilemma and figure out whether low-margin high-leverage could be the best friend of a trader or just a risky way to over-extend your budget.
Forex leverage for beginners
You will often be prompted to decide how much leverage you want to have access to whenever you sign up for a trading account. But what is forex forex leverage, and how does it impact the margin? Let’s talk about what it isn’t, first. This isn’t a loan. In the past, there has been a habit for new and small brokers to define leverage as an interest-free loan that allows you to open a significant position without making a large deposit. Only half-true, that is.
By using a trading example, the very best way to describe forex leverage is. In order to keep things simple, we will skip the calculation of the Ask/Bid and not have a spread.
Trading without Leverage
The leverage ratio is set at 1 or 1:1 in this example. No leverage, in other words. Let’s say that in his forex trading account, a trader has $100 and he’s prepared to risk it all.
At the price of 1.0000, the trader buys a $100 CFD of ABCXYZ (without forex leverage).
Suddenly, the price of ABCXYZ rises to 1.0200, so that the contract’s value increases to $102.00. A $2 Rolling Profit.
1 Leverage (1:1) means that the investment positions you make don’t increase. To achieve greater profit potential, this implies that a higher deposit is required. It also means that your account balance won’t be wiped out so quickly by a dramatic change in the forex market. It is clear the pros and cons of 1 leverage.
Trading with Leverage
Into the trade, let’s factor leverage and see what happens. Another trader is making the same trade at exactly the same time, but she has a leverage of 1:50.
She risked $100 just the same way, but thanks to forex leverage, her open position was multiplied to $5000.
Similarly, the price increased to 1.0200, which increased the value of the leveraged $5000 open position to $5100. $100 is the profit on the leveraged position.
The amount of money risked was $100 in both cases, but the profit was fifty times greater because of leverage in the second case. What’s the catch, then?
The thing about forex leverage nobody likes to talk about
To demonstrate the dangers of forex leverage, let’s modify the example above. The price of ABCXYZ will go down this time.
The trader without leverage sees XYZABC’s price fall to 0.9800, but he’s not overly concerned about it. His open order does have a value of $98.00.
Alternately, with 1:50 leverage, our leveraged trader makes the same $100 order. The order holds a 5000 dollar market position. The leveraged position rapidly falls to $4900 in value when the ABCXYZ price falls to 0.9800. A $100 loss. The trader lost the entire $100 investment in a very short 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
Forex traders have personal preferences as to which better investments are assets. Those that trade with a system of risk management tend to keep their leverage ratio low. Risk management is simply a set of predetermined rules that will limit on a daily basis how you invest. Most forex trading professionals insist that consistency is key and it is recommended to manage risk.
That being said, there are some assets that have very high trading volumes on the foreign exchange market, which tend to limit daily price movements. Others have low liquidity and are energetically reacting. Let’s look at the more popular one and see if you can figure out which is $100’s best leverage.
Major currency pairs
USD is always included in the pairing of a major currency pair. EURUSD (Euro vs US Dollar) is by far the world’s most traded asset, and therefore has the highest volume of trading from traders around the globe. The pair will show a drop in volume and value if a major investor decides to sell off their EURUSD, so the price will fall. But, since EURUSD is traded so massively, the sell-off is only a tiny fraction of the volume, so the price is only going to drop slightly.
So for beginners wanting to trade EURUSD, what is the best forex leverage?
Low movement in prices means low profits and losses. If you want to trade just for entertainment value, low forex leverage is always a good idea, but you can choose a higher leverage ratio if you are looking for a greater risk/reward.
Minor and exotic currency pairs
The most appropriate optimal leverage for beginners is certainly low when it comes to minors and exotics. The trading of these two kinds of forex pairs in Forex presents a much greater risk of loss. The risk is only multiplied by margin requirements and high leverage. Because trading volumes are small compared to majors, large investors can have a market impact, so prices are much more volatile than majors.
Is it a good idea for forex traders to use leverage?
The advantages of forex leverage are highly tempting. Up to 2000 leverage can be obtained by an Exness trader (1:2000), and in some instances even more.
The price rise of ABCXYZ to 1.0200 with a high-risk leverage of 1:2000 would have generated $4000 profit from a $100 investment, to put that into perspective based on the trade example above. But the traders’ funds would be completely wiped out in seconds by a slight fall in price to 0.9995 for ABCXYZ.
In order to reduce the margin call, instruments such as Stop Loss, Take Profit, and Trailing Stop are strongly recommended when using high forex leverage on a well-funded trading account. In addition, avoid using high leverage during volatile times, such as basic news releases,
Exness allows you from a single signup to open multiple forex trading accounts, so you can select which leverage best suits the symbol you are targeting. Using the free demo account to make a few test trades on both 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 for trading.
For the first few weeks, keep your financial targets low. Locate a balance. When your forecasts are correct, you will want to have sufficient leverage to produce interesting profits, but not too high that your margin will be zeroed out by an unexpected price fluctuation. Mastery will not occur overnight, and in the first few weeks, the risk of losing your entire account balance is high, so be conservative.
In the financial world, it is recommended that you immerse yourself. After the main stories, do not switch off the news. Listen, even if you don’t understand what they are saying, to the business analysts who talk about the economy. It’s a great way of learning passively.
Exness Academy offers a quality selection of educational videos that you can check and professional traders ready to share their knowledge and experience are overflowing with Youtube.
It gets easier with time, just like riding a bike, driving a car, or playing a new video game. What starts as a stressful commitment can become a pleasant activity that also provides the obvious attraction of being profitable.
Think of it as an exciting hobby which in the future offers great potential. Enjoy the excitement of victory, fight against every loss, and learn every single day. You’ll be trading like a pro in no time at all.