Leverage becomes a feature some traders consider when choosing a broker. However, is it wise to just make use of the highest leverage offered by a forex broker?

Leverage becomes one of feature some traders consider when choosing a broker. Broker usually offers leverage ratio 50:1 or even as high as 3000:1. By trading using leverage, trader is not necessarily depositing too much money for capital. Leverage is also good for a beginner who does not much capital to start trading.

 

Leverage at a Glance

So what is leverage? Let's assume you've been keeping up with all the buzz that's been surrounding foreign exchange trading, and you've decided that you want to give it a go. You are aware, however, that doing so will not come cheap and may really cause a significant hole in your finances, particularly if you intend to make a significant investment.

When you want something that's out of your price range in the real world, you often acquire a loan to pay for it. This type of borrowing system is referred to as leverage in forex trading. To put it simply, leverage refers to the practice of performing financial transactions using money that has been borrowed from a broker. The unique thing is that you don't have to pay back the loan as leverage would automatically decrease your margin ratio.

 

Choosing the Best Leverage

If you're curious about how much money you can really borrow from the broker, the answer is that it varies greatly from one broker to the next. While some brokers choose to safely provide lower leverage, others provide higher ones. It is important for you to be aware that the majority of brokers need some form of evidence that you are a competent trader before they would provide you access to higher leverage.

There's nothing like ideal leverage. What you need to do is review before choosing a leverage level. You can follow these three rules:

  1. Stay patient in low levels of leverage.
  2. You can use trailing stops to reduce downside and protect your capital.
  3. Limit your capital to 1-2 percent of total trading capital on each position you're taking.

If you are just starting out in the foreign exchange market, you probably aren't eager to invest so much money just in case everything goes wrong. It is for this reason that it is essential to employ leverage on your account so that you can still get the most out of forex trading without risking an excessive amount of your own investment capital.

For beginners, the greatest leverage for you to use is one that is one hundred times your first investment. However, if you are just starting out in foreign exchange trading and have a budget of roughly $500 to put into the market, the greatest leverage for you to use is one that is 50 times your first investment.

In other words, here are the recommended leverages for beginners based on the capital:

  • $0-$100: 100x the first investment
  • $100-$500: 50x the first investment.

Note that the capital parameter doesn't exceed $500 as it would not be relevant to typical beginners' conditions. So, the best leverage depends on how much capital you're willing to invest in your trading account. Once you decide that, you'll know what leverage to use. Just make sure you're careful, as too much leverage is dangerous. 

 

Conclusion

Besides those rules, what you need to remember is to use the leverage level you're most comfortable with. Choose your leverage level based on your profile risk. If you're more conservative trading who avoid too much risk, pick low leverage, like 5:1 or 10:1 But if you are a more moderate trader, who's challenged by risk, you can pick higher leverage like 30:1 or 50:1.

You also need to use a stop loss. It will help you reduce the risk of loss when a trade goes in the opposite direction than you predicted. It will also help traders reduce the emotional obstacle from your trading desk.

 

If you are a professional and want to trade with high leverage, check out a few CySEC-regulated brokers that offer them here, including, Exness, and FXTM.