Many said that leverage is like a double-edged sword. The higher it is, the higher the risks. Considering the popularity, is 1:500 leverage good for your trade?
Forex brokers offer various lengths of leverages, ranging from 1:5 to 1:1000 per trade. Yet, it's common knowledge that taking too high of leverage can be dangerous, so many traders opt to play safe.
Those still wanting to taste the advantage of using leverage typically choose 1:500 leverage as it's not too low or high. But the fact is, regulatory standards from practically all major countries decide that 1:30-1:50 is the maximum limit when it comes to leverage.
So, is it safe if we still want to trade with 1:500 leverage? The short answer is yes, only if you don't overtrade and are ready to face the risks and conditions. What are they?
To answer the question, let's first understand how trading with 1:500 leverage works.
Trading with 1:500 Leverage
Let's say a trader has $1000 in his deposit. If he uses a 1:1 leverage, it means that he can only trade with his own funds. So, if he has $1,000, then the maximum position that he can open is $1000.
However, if he uses a 1:500 leverage, then he can open a position of 500 times more volume than the capital he owns. Therefore, if he has $1000, then he can open a trade of up to $1,000 x 500 = $500,000.
Benefits of Trading with 1:500 Leverage
Leveraged trading can be good because of these several advantages:
- A Chance to Amplify Volume and Increase Profit
Using leverage could give traders an opportunity to increase their trading position and make a huge profit out of it. This means that a successful leveraged trade can produce a much higher profit than a regular winning trade. With only $1000, you could open a $500,000 trade if you use a leverage of 1:500. Should you make a profit from this trade, then the amount would be 500 times larger than you normally would with your initial $1000 funds.
- Improving Capital Efficiency
Let's say you have a $10,000 deposit in your account. If you don't use leverage, then you need to use all of your money to open a $10,000 trade. However, if you use a 1:500 leverage, then you would only use $20. As a result, this gives you the opportunity to use the remaining $9,980 to trade other opportunities in the market.
- Low Entry Level
Normally, there's not much to do if you only have a limited amount of capital in your account. You wouldn't be able to trade EUR/USD with $20 because usually, one standard lot is accounted for 100,000 currency units. If you want to open a EUR/USD trade at the price of 1.17470, then you would need at least 100,0000.01 x 1.17470 = $1174.70. However, there is an opportunity to open such a large position with only small capital if you use 1:500 leverage. Therefore, this gives a chance for small traders to participate in the market and get the same opportunity.
Watch Out for These Conditions
The concept of leverage must sound really attractive for many traders and indeed, it can bring many notable advantages in forex trading. However, it is important to understand that big profit is often associated with some risks. As such, you need to be careful of these conditions:
- Using high leverage like 1:500 may look profitable, but it is definitely risky even for professional traders. In fact, many countries like the US, Japan, and the EU forbid the use of such high leverage due to the unavoidable risk of losing. This is a part of the authority's attempt to protect clients from getting too much loss.
- The regulatory standards left many well-regulated brokers unable to provide 1:500 leverage. Those remaining with 1:500 leverage are usually licensed by offshore financial agencies which are considered less credible.
- If you want to use high leverage like 1:500, then you need to have sufficient skill as well as be experienced in the forex market. As if that's not hard enough, you also need to make sure that your trading style and strategy support the use of high leverage.
- Typically, higher leverages are more suitable for traders who open and close positions within a few hours because then, they could get maximum profit from short-term transactions. This is why high leverages are mostly popular among scalpers.
High leverage allows small retail traders to make high returns from their trades. Although the number may sound pretty extreme for many people, it is perhaps the only way for small traders to access the forex market without risking too much money. When using leverage, practically anyone could join the market and even trade against big players like banks and hedge funds.
On the other side of the spectrum, we also need to consider the risks that come with high leverage. Using small leverage is actually risky enough for retail traders, let alone a big one like 1:500. Remember that leverage can magnify not only the potential profit but also the potential risk of your trade. It could increase the chance of your account being wiped out 500 times higher.
If you want to open a leveraged trade, you need to make sure that you understand how leverage works and how much leverage is suitable to you. The level of leverage you choose should depend on several factors such as your skill, experience, and risk tolerance in forex trading.
Apart from that, you also need to have a good risk management system. You could use a margin calculator to get the right amount of trade size, keep the positions small, use trailing stops, or limit the amount of money you use in each trade.
High leverage like 1:500 may not be suitable for any trader because of its extremely high risk. Without a good understanding of the market and a solid trading strategy, high leverage can make you lose money in no time. Therefore, if you want to keep your risk small, starting with 1:5 or 1:10 could be much safer.
But if you're a seasoned trader and know how to minimize the risks, then yes, 1:500 leverage is safe enough for you. If you're looking to do so, here's a list of brokers providing 1:500 leverage.