Everyone knows that leverage is a crucial part of forex trading, but have you known about floating leverage? Is it bad or good?

The dilemma between fixed and floating in forex trading is commonly associated with spreads. Not many traders are aware that it also applies to leverage, partly due to a lack of information from brokers. From their point of view, it's quite understandable since trading with floating leverage doesn't sound appealing to many traders; leverage is always connected to the margin so the change in leverage would also mean an adjustment in margin requirement. Why bother dealing with margin changes when you can easily trade with fixed leverage?

What is Floating Leverage

Nevertheless, floating leverage does exist in some brokers and if you happen to trade with a broker that exercises it, you definitely need to understand what it is and how it works. Otherwise, you'll be left unaware when the margin requirement increases, and consequently, you can't do anything when your position is suddenly closer to getting stopped out.

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Basic Guide to Floating Leverage

It's not exactly difficult to comprehend what exactly is floating leverage, for it carries out what its term implies. The common leverage is known to never change so it's actually categorized as fixed leverage. On the other hand, floating leverage can change under certain conditions, usually based on the trading volume or equity.

Volume-based floating leverage typically decreases along with the increase of trading volume. Say you initially trade with 1:200 leverage. When your trading volume amounts to more than $3 million, the leverage would be automatically changed to 1:100. The adjustment can apply to the next level of volume increase, depending on how your broker sets the rule. It is important to note that the change of margin requirement that is brought by the new leverage would only apply to positions opened after the adjustment So, you don't have to worry about increased margin in your previous trades.

What about the equity-based floating leverage? The idea is similar, but instead of using trading volume as the basis, floating leverage will be set upon the amount of equity in your trading account. In a scenario where leverage would be adjusted for every $10,000 change in equity, you may deal with a leverage decrease every time your equity passes the threshold of $10,000, $20,000, $30,000, and so on. Conversely, your leverage can be increased when your equity declines.

 

Which Type of Floating Leverage is Better?

For a trader, volume-based floating leverage is much more complicated because it's vulnerable to market changes. It's common knowledge that the forex market is full of uncertainties, so the probability of getting a leverage adjustment due to volatility changes is higher than you initially think. Another thing is, the volume-based policy's stance towards leverage change always leads to a decrease, so traders are consistently required to pay attention to margin increase.

On the other side, equity-based floating leverage is less exposed to market risks. Should the equity increase due to floating profits in the account, traders could just withdraw funds from their account as equity is made up of balance and the floating profit/loss. In addition, the policy is more flexible as the leverage can be adjusted higher or lower depending on the equity change.

 

 

Why Do Brokers Apply Floating Leverage?

With the existence of fixed leverage that is much more simple and appealing to clients, you may wonder why some brokers choose to use floating leverage in the first place.

To start with, leveraged positions are mostly possible because of the broker's capital. When a trader increases their risks by building up their trading volume or equity, a big portion of the broker's capital would be also put at risk. By lowering the leverage, brokers would be able to alleviate their risks, ensuring their survival in the future.

One more reason that supports the application of floating leverage has something to do with brokers' preference on clients that they think are deserving of high leverage. Indeed, leverage is originally intended for traders who really need it; those with small accounts who have little to no urge to go big in their trades. When a trader is capable of opening large positions or increasing their equity to more than $10,000, they will be considered experienced. They don't necessarily need high leverage to support their trades. Increasing the risk exposure to support such traders would be a waste in the eye of the broker.

 

Brokers with Floating Leverage

There are not many brokers using floating leverage. For those who do, they prefer to mention it on terms and conditions. That's why you may never find a broker explaining their floating leverage in the same manner they promote zero spreads or fast execution.

To name a few, some brokers known for their volume-based floating leverage are:

As for those going with the equity-based floating leverage are:

Floating leverage is sometimes not imposed on all account types. In fact, most brokers can apply different types of leverage for each account type or each asset class. A broker may use fixed leverage in the Standard account but apply floating leverage for the Pro account. Similarly, a broker can go with fixed leverage for its forex trading but apply floating leverage on CFDs, ETFs, and cryptocurrencies.

All information on floating leverage rules is usually described in the agreement terms from when a trader opens an account or displayed as little notes below the trading account/contract specification table on the broker's webpage. When the trading volume or equity surpasses the broker's limit and activates a change in leverage, there will be no notification to remind traders.

Brokers who normally operate with fixed leverage can temporarily switch to floating leverage in case of extreme market changes. For example, a 1:100 leverage for cross currency pairs can be reduced to 1:50 due to an upcoming event that may cause price spikes. Irregular change of condition like this is usually announced by the broker using its official channels and other communication means so that every trader would be notified.

As the practice can be different for each broker, it is highly recommended to ask the broker's customer support regarding the terms and conditions on floating leverage.

 

What It Means to You

Taking everything into consideration, does it mean you should avoid a broker with floating leverage even though there are other qualities that you like from the broker? Supposed you're attracted to an ECN broker for its raw spread, do you have to let it go just because the broker uses floating leverage? What if the raw spread is an integral part of your trading strategy?

Well, you don't necessarily have to take such a measure, especially if you're a retail trader who plans to trade with normal position sizes and equity below $10,000. After all, the adjustment in floating leverage is usually activated when your volume or equity reaches a certain extreme level that is unusual for most traders. It is believed that only scalpers, expert advisor users, and other types of traders who deal with big volumes are affected by floating leverage.

If you end up with a broker that applies floating leverage, you only need to learn your broker's policy regarding that matter and consult with the customer service to avoid any possible misunderstanding. Later on, make sure that your volume or equity never surpasses the limit for floating leverage. Should the condition be unavoidable, you could prepare to increase your margin so your account is not vulnerable to margin call or stop out.