Leverage in Forex trading is a very frequently-used tool that increases the potential of your positions. It can be classified as a type of loan that you receive from the Forex broker to increase the size of your positions. While leverage can increase the potential profits that you earn in Forex trading, it can also increase the losses.
Because of this, leverage is known to be a rewarding yet dangerous thing to use. If not used correctly, it can end up costing traders a lot of money. However, if used correctly, it can drastically increase your profits. Depending on your location and the broker you are using, the leverage available for you can vary drastically.
Over the years, to make Forex trading less risky, several regulators around the world have introduced some restrictions on the available leverage. But, this is not all. There are many other things that traders should know about Forex trading leverage and the way it works. So, follow our guide to Forex leverage for beginners and discover everything that there is to know about leverage in Forex trading.
Leverage in Forex trading – How does it work?
When you are trading using leverage, you are essentially using borrowed funds to increase the size of your trading positions beyond what your initial account balance would allow. Forex brokers in the market allow trading with leverage thanks to margin trading, which means that the broker provides you with borrowed funds. While using leverage, traders are able to profit from small price changes in the market.
Forex trading on leverage is very popular around the world. The main reason for this is that it lets traders make high profits even from the slightest movements in the market. Understanding how leverage works can be very beneficial for traders because of its popularity in the market.
By understanding how exactly it works and how it can influence your positions, you can make more well-informed decisions regarding your positions in the Forex trading market. We can discuss a specific example of Forex leverage to help you better understand its real meaning.
So, let’s say that you are a Forex trader using the leverage of 1:100. This means that for every $1,000 dollar on your account, you can trade a position worth one standard lot, meaning $100,000. By doing so, increases your chances of generating higher profits.
There are many different traders who are using higher Forex trading leverage, however, it is very important to keep in mind that using higher leverage if you do not have enough experience in the market might be a dangerous thing to do. The leverage is ofter regarded as a double-edged sword, and not for the wrong reason.
Forex leverage chart – Different amounts of leverage
Forex trading is a very diverse market. There are thousands of Forex brokers in the market and all of them offer traders different types of services. According to the location of the Forex broker, it might be required to limit the amount of leverage it offers to traders. However, there might also be other reasons for brokers to limit the available leverage.
In most cases, leverage is given in a fixed amount and can vary with different brokers. Each of the Forex brokers in the market gives traders access to different amounts of leverage, mostly depending on the rules and regulations they have to follow. In the Forex trading market, you can come across leverages up to 1:50, 1:100, 1:200, 1:400, and so on.
Forex leverage formula is very simple, all you have to do is to multiply the amount of money on your account to the available leverage. So, let’s say that you deposited $100 dollars on your account and the broker offers you a leverage of 1:30. This means that you will be able to open a position worth $3,000. If the available leverage was 1:300, you would be able to open a position worth $30,000 and so on.
Professional Forex traders & leverage
Depending on your level of expertise in the market, you might be offered different amounts of leverage. In most cases, leading Forex brokers around the world decide to offer Forex traders with more experience higher leverage. This is mostly because highly skilled Forex traders are more likely to know the risks of using higher leverage, because of which, they will choose the leverage they want to use more wisely.
On the other hand, some experts also claim that majority of highly skilled, professional traders actually use lower leverage. In fact, there are many professional Forex traders in the market who are using the leverage of about 1:10, or 1:20. This can be a great indication that just because a broker offers higher leverage, it does not mean that you should be using it.
That said, there also are many professional traders who are using very high leverage. The thing about Forex trading and leverage is that it is very important to know when you should or should not use high leverage. There are several things that it depends on, it includes the experience that you have, the assets you are trading, and the strategy that you are using.
What is the Forex best leverage?
Saying that any amount of Forex leverage is better than the other is simply impossible. Every single Forex trader is very different from one another, and while a certain amount of leverage might work for some, it might be too little or too much for others. There are certain things that the amount of leverage you should use while trading Forex depends on.
First of all, a very important thing is your experience. If you are some with no experience in Forex trading whatsoever, using higher leverage does not make any sense. This will only increase the risks associated with trading and might be very damaging. However, experience is not the only thing that matters when choosing leverage for trading.
Another very important factor that many tend to forget is the trading strategy that you are using. If you are a Forex trader who is using short-term Forex trading strategies, such as scalping, for example, using higher leverage might be the best way to earn higher profits.
Those who are using short-term trading strategies such as scalping and day trading tend to make very low profits with single positions. For these traders, it is vital to use leverage as the profits made without it will not be enough at all. On the other hand, if you are a trader who uses long-term trading strategies, you might be better of using lower leverage.
At the end of the day, the best Forex trading leverage is the amount that works for you best. If you are a trader with enough experience and knowledge in the market and you are sure that your position is going to be a success, there is nothing wrong with using higher leverage. However, if you think that you do not have enough experience and expertise in the market, you might be better of using a Forex low leverage.
Pros & Cons of using leverage in Forex
There are numerous Forex leverage brokers available in the market. All of them offer traders different types of leverage. However, before you decide to use leverage while trading Forex, it is very important to make sure that you understand everything around them. To help you better understand how Forex trading leverage works, we would like to discuss some of the biggest advantages and disadvantages of using Forex leverage.
Pros of Forex trading with leverage
When it comes to Forex trading with higher leverage, there are a lot of advantages. One of the biggest advantages is that it lets traders make huge profits with very little initial deposit. Forex leverage can be a great way to earn profits with lower initial account balances, which can be of great importance for Forex traders.
It lets traders using their money to its fullest potential and even more than that. The leverage in the Forex trading market is capable of increasing the financial capabilities of Forex traders, thus, increasing the trading results. Another huge advantage of using leverage while trading Forex is that it is easily customizable.
If you believe that you can’t tolerate the risks associated with higher leverage anymore, you can easily change it and start using lower leverage. On the other hand, if you believe that your positions are correct and you would like to use higher leverage than usual, you can do that as well.
Cons of Forex leverage account
As with anything else in the Forex trading market, there are several disadvantages associated with using higher leverage as well. As much as leverage can help you become a more successful trader, it can also drastically increase the risks that are associated with forex trading. Because of the huge risks that are associate with using higher leverage, many call it a double-edged sword.
As we have already said above, as much as using Forex leverage can be popular among investors around the world, it can also increase the risks associated with Forex trading. In fact, many view using higher leverage while trading Forex as a very dangerous thing.
The main reason for this is that the risks of Forex trading increase drastically when you are using higher leverage. While it is true that leverage can increase the profits made while trading Forex, it can also increase the losses. This means that you might end up having to pay the broker the money that you have borrowed, this might affect your trading a lot.
There have been many instances in the Forex trading market when traders lost more money than they initially had on their accounts. Because of this, some of the traders have needed up on the negative side. This can be a very dangerous and scary thing for traders. It is very important to always make sure that you know what you are doing before you start using higher leverage.
That said, there still are some ways you can avoid some of these risks. For example, there are some brokers that have adopted the so-called Negative Balance Protection, which is one of the best ways when it comes to fighting against the losses caused by using higher leverage. This protection makes sure that no matter what happens, you do not lose more money than you already have deposited in your account.
Forex brokers leverage comparison – Laws around the world
Because of the risks associated with Forex trading with higher leverage, the majority of the countries around the world have decided to adopt different types of restrictions. For example, European Union is among the strictest regions around the world that require Forex brokers to offer leverage no more than 1:30 to retail Forex traders.
Recently, the Australian Forex regulator also joined the European regulators and banned leverage higher than 1:30. The main idea behind such restrictions is to make sure that traders do not lose more money than they can afford. Although there are regions that are very strict when it comes to the available leverage in the market, there also are many others who make sure that traders are able to use higher leverage so that they can earn more profits.
Final thoughts on the best Forex leverage to use
Forex trading leverage is a very rewarding yet dangerous tool that is used by millions of traders around the world every day to increase the potential of their account balance. Forex leverage can be classified as a type of borrowed money that you receive from the Forex broker in order to trade Forex and increase your profits.
However, leverage is very much like a double-edged sword that can increase the risks associated with Forex trading. Because of this, there are some people who prefer to not use higher leverage. At the end of the day, the amount of leverage that you use depends on your personal preferences.
While there are some people who enjoy trading with higher leverage, there also are others for whom using high leverage is too much and they prefer to use lower leverage.
Frequently Asked Questions on Forex trading leverage
What are the benefits of leverage?
While there are many risks associated with Forex trading leverage, there also are many advantages. One of the biggest advantages is that Forex leverage profit is much higher than regular profits made without leverage. If you are a short-term trader, investing in the market without leverage can be a bit harder because the profits made without leverage simply won’t be enough.
On the other hand, using higher leverage can increase your potential wins in the market which can be a huge advantage for many.
What are the risks of Forex leverage trading?
There are several risks associated with using Forex trading leverage. One of the biggest risks is that there is a chance for trader using leverage in Forex trading to lose more money than they have on their trading account. To avoid this, the majority of Forex brokers around the world have adopted the negative balance protection, which guarantees that the balance of Forex traders never goes into the negative side.
