One of the reasons so many people are attracted to trading forex compared to other financial instruments is that with forex, you can usually get much higher leverage than you would with stocks. While many traders have heard of the word "leverage," few know its definition, how leverage works, and how it can directly impact their bottom line.
The concept of using other people's money to enter a transaction can also be applied to the forex markets. In this article, we'll explore the benefits of using borrowed capital for trading and examine why employing leverage in your forex trading strategy can be a double-edged sword.
Leverage involves borrowing a certain amount of the money needed to invest in something. In the case of forex, money is usually borrowed from a broker. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up—and control—a huge amount of money.
To calculate margin-based leverage, divide the total transaction value by the amount of margin you are required to put up:
For example, if you are required to deposit 1% of the total transaction value as margin and you intend to trade one standard lot of USD/CHF, which is equivalent to US$100,000, the margin required would be US$1,000. Thus, your margin-based leverage will be 100:1 (100,000/1,000). For a margin requirement of just 0.25%, the margin-based leverage will be 400:1, using the same formula.
Margin-Based Leverage Expressed as Ratio
Margin Required of Total Transaction Value
400:1
0.25%
200:1
0.50%
100:1
1.00%
50:1
2.00%
However, margin-based leverage does not necessarily affect risk, and whether a trader is required to put up 1% or 2% of the transaction value as margin may not influence their profits or losses. This is because the investor can always attribute more than the required margin for any position. This indicates that the real leverage, not margin-based leverage, is the stronger indicator of profit and loss.
To calculate the real leverage you are currently using, simply divide the total face value of your open positions by your trading capital:
Real Leverage = Total Value of Transaction / Total Trading Capital
For example, if you have $10,000 in your account, and you open a $100,000 position (which is equivalent to one standard lot), you will be trading with 10 times leverage on your account (100,000/10,000). If you trade two standard lots, which are worth $200,000 in face value with $10,000 in your account, then your leverage on the account is 20 times (200,000/10,000).
This also means that the margin-based leverage is equal to the maximum real leverage a trader can use. Since most traders do not use their entire accounts as margin for each of their trades, their real leverage tends to differ from their margin-based leverage.
Generally, a trader should not use all of their available margin. A trader should only use leverage when the advantage is clearly on their side.
Once the amount of risk in terms of the number of pips is known, it is possible to determine the potential loss of capital. As a general rule, this loss should never be more than 3% of trading capital. If a position is leveraged to the point that the potential loss could be, say, 30% of trading capital, then the leverage should be reduced by this measure. Traders will have their own level of experience and risk parameters and may choose to deviate from the general guideline of 3%.
Traders may also calculate the level of margin that they should use. Suppose that you have $10,000 in your trading account and you decide to trade 10 mini USD/JPY lots. Each move of one pip in a mini account is worth approximately $1, but when trading 10 minis, each pip move is worth approximately $10. If you are trading 100 minis, then each pip move is worth about $100.
Thus, a stop-loss of 30 pips could represent a potential loss of $30 for a single mini lot, $300 for 10 mini lots, and $3,000 for 100 mini lots. Therefore, with a $10,000 account and a 3% maximum risk per trade, you should leverage only up to 30 mini lots even though you may have the ability to trade more.
Leverage in Forex Trading
In the foreign exchange markets, leverage is commonly as high as 100:1. This means that for every $1,000 in your account, you can trade up to $100,000 in value. Many traders believe the reason that forex market makers offer such high leverage is that leverage is a function of risk. They know that if the account is properly managed, the risk will also be very manageable, or else they would not offer the leverage. Also, because the spot cash forex markets are so large and liquid, the ability to enter and exit a trade at the desired level is much easier than in other less liquid markets.
In trading, we monitor the currency movements in pips, which is the smallest change in currency price and depends on the currency pair. These movements are really just fractions of a cent. For example, when a currency pair like the GBP/USD moves 100 pips from 1.9500 to 1.9600—that is, just a 1 cent move of the exchange rate.
This is why currency transactions must be carried out in sizable amounts, allowing these minute price movements to be translated into larger profits when magnified through the use of leverage. When you deal with an amount such as $100,000, small changes in the price of the currency can result in significant profits or losses.
Risk of Excessive Real Leverage in Forex Trading
This is where the double-edged sword comes in, as real leverage has the potential to enlarge your profits or losses by the same magnitude. The greater the amount of leverage on the capital you apply, the higher the risk that you will assume. Note that this risk is not necessarily related to margin-based leverage although it can influence if a trader is not careful.
Let's illustrate this point with an example. Both Trader A and Trader B have a trading capital of US$10,000, and they trade with a broker that requires a 1% margin deposit. After doing some analysis, both of them agree that USD/JPY is hitting a top and should fall in value. Therefore, both of them short the USD/JPY at 120.
Trader A chooses to apply 50 times real leverage on this trade by shorting US$500,000 worth of USD/JPY (50 x $10,000) based on their $10,000 trading capital. Because USD/JPY stands at 120, one pip of USD/JPY for one standard lot is worth approximately US$8.30, so one pip of USD/JPY for five standard lots is worth approximately US$41.50. If USD/JPY rises to 121, Trader A will lose 100 pips on this trade, which is equivalent to a loss of US$4,150. This single loss will represent a whopping 41.5% of their total trading capital.
Trader B is a more careful trader and decides to apply five times real leverage on this trade by shorting US$50,000 worth of USD/JPY (5 x $10,000) based on their $10,000 trading capital. That $50,000 worth of USD/JPY equals just one-half of one standard lot. If USD/JPY rises to 121, Trader B will lose 100 pips on this trade, which is equivalent to a loss of $415. This single loss represents 4.15% of their total trading capital.
This table shows how the trading accounts of these two traders compare after the 100-pip loss.
Trader A
Trader B
Trading Capital
$10,000
$10,000
Real Leverage Used
50 times
5 times
Total Value of Transaction
$500,000
$50,000
In the Case of a 100-Pip Loss
-$4,150
-$415
% Loss of Trading Capital
41.5%
4.15%
% of Trading Capital Remaining
58.5%
95.8%
*All figures in U.S. dollars
How Does Forex Margin Compare to Stock Trading?
Leverage in the forex markets tends to be significantly larger than the 2:1 leverage commonly provided on equities and even the 15:1 leverage provided in the futures market. Although 100:1 leverage may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading (trading within one day
Are Forex Markets Volatile?
Forex markets are among the most liquid markets in the world. Hence, they tend to be less volatile than other markets, such as real estate. The volatility of a particular currency is a function of multiple factors, such as the politics and economics of its country. Therefore, events like economic instability in the form of a payment default or imbalance in trading relationships with another currency can result in significant volatility.
How Much Leverage Should I Use?
Traders should choose the level of leverage that makes them most comfortable. If you are conservative and don’t like taking many risks, or if you’re still learning how to trade currencies, a lower level of leverage like 5:1 or 10:1 might be more appropriate. More seasoned or risk-tolerant traders may be comfortable with 50:1 or 100:1+.
The Bottom Line
There's no need to be afraid of leverage once you have learned how to manage it. The only time leverage should never be used is if you take a hands-off approach to your trades. Otherwise, leverage can be used successfully and profitably with proper management. Like any sharp instrument, leverage must be handled carefully—once you learn to do this, you have no reason to worry.
Smaller amounts of real leverage applied to each trade affords more breathing room by setting a wider but reasonable stop and avoiding a higher loss of capital. A highly leveraged trade can quickly deplete your trading account if it goes against you, as you will rack up greater losses due to the bigger lot sizes. Keep in mind that leverage is totally flexible and customizable to each trader's needs.
This is where the double-edged sword comes in, as real leverage has the potential to enlarge your profits or losses by the same magnitude. The greater the amount of leverage on the capital you apply, the higher the risk that you will assume.
Many professional traders say that the best leverage for $100 is 1:100. This means that your broker will offer $100 for every $100, meaning you can trade up to $100,000.
Trading with 1:500 leverage is recommended only for those who have some experience in the foreign exchange market. Novices should be warned that if they try to apply it, they are likely to lose their entire account balance – probably in a matter of seconds.
For example, opening a trade with $100 and 20x leverage will equate to a $2000 investment. Is leverage good in the stock market? Leverage trading can be good because it lets investors with less cash increase their buying power, which can increase their returns from successful investments.
Therefore, with a $10,000 account and a 3% maximum risk per trade, you should leverage only up to 30 mini lots even though you may have the ability to trade more.
The main risk of using 1:50 leverage is, of course, associated with the possibility to lose a lot of money. In fact, it is possible to lose more than you have deposited in your account when using excessive leverage without any stop losses or other tools for fund protection.
$300 is the minimum amount of money required in a mini lot account, and the best leverage on this account is 1:200. This would mean you will have $60,000 to trade with. Other leverage you can use in forex trading include; 1:50.
Yes, you can earn USD $300 per day through Forex. Even so, with a decent win rate and risk/reward ratio, a dedicated forex day trader with a decent strategy can make between 5% and 15% a month thanks to leverage. Also remember, you don't need much capital to get started; $500 to $1,000 is usually enough.
Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, rather than being an easy road to riches, forex trading can be a rocky highway to enormous losses and potential penury.
With a $200 forex account, you can trade a micro lot size of 0.01, which is equivalent to 1,000 units of the base currency. Trading with a micro lot size of 0.01 allows you to control your risk exposure and manage your trades effectively.
Forex traders should choose the level of leverage that makes them most comfortable. If you are conservative and don't like taking many risks, or if you're still learning how to trade currencies, a lower level of leverage like 5:1 or 10:1 might be more appropriate.
Scalping consists in using very high leverages — typically 1:1000 or even 1:3000 — to open trades on pairs with a low spread, aiming at a small target in terms of pips, usually compensating the higher risk exposure with tighter stop-losses.
What is the best leverage level for a beginner? If you are new to Forex, the ideal start would be to use 1:10 leverage and 10,000 USD balance. So, the best leverage for a beginner is definitely not higher than the ratio from 1 to 10.
Now you are in the market with $50 x 100 = $5000 worth of contracts. It is attractive because if the price of BTC goes up, Your profit has also increased ten times.
A financial leverage ratio of less than 1 is usually considered good by industry standards. A leverage ratio higher than 1 can cause a company to be considered a risky investment by lenders and potential investors, while a financial leverage ratio higher than 2 is cause for concern.
If you use 10x leverage, your position will be multiplied by ten. So if you have a 5% increase, the result will be multiplied by ten (the leverage), which means you will have 50% profit instead of the 5% you had without leverage.
Although 100:1 leverage may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading (trading within one day). 6 If currencies fluctuated as much as equities, brokers would not be able to provide as much leverage.
The best leverage for $50 is 1:100 for traders outside of the EU. If you are not a resident of the EU then the leverage restrictions are very relaxed. They can go as high as 1:3000 leverage in some financial jurisdictions. The best leverage a $50 account can open in forex will depend on the broker you choose.
As you know, when you trade using leverage, you are borrowing funds from your broker. These borrowed funds often come with interest charges, which can accumulate over time, especially in long-term positions. Unfortunately, these interest charges will often reduce your overall profit or add to your losses.
Using leverage is another technique that professional investors may use to provide greater potential for profit. It can also result in greater losses, although typically not more than you put in. In essence, leveraging allows you to use borrowed money to invest a greater amount and therefore amplify your results.
Margin trading using 100x leverage has both advantages and risks. If the trade is successful, you can gain profits equal to the increased portion size. However, if it is unsuccessful, the trader can lose the initial investment.
For example, a trading account with leverage of 1:30 means that a trader can open a position 30 times the size of their margin. The knock-on effect of this will be that any profit or losses will also be subject to the same multiplication of 30.
Using leverage can result in much higher downside risk, sometimes resulting in losses greater than your initial capital investment. On top of that, brokers and contract traders will charge fees, premiums, and margin rates. Even if you lose on your trade, you'll still be on the hook for extra charges.
Most traders shouldn't expect to make that much; while it sounds simple, in reality, it's more difficult. Even so, with a decent win rate and risk/reward ratio, a dedicated forex day trader with a decent strategy can make between 5% and 15% per month, thanks to leverage.
First, pattern day traders must maintain minimum equity of $25,000 in their margin account on any day that the customer day trades. This required minimum equity, which can be a combination of cash and eligible securities, must be in your account prior to engaging in any day-trading activities.
A day trader might make 100 to a few hundred trades in a day, depending on the strategy and how frequently attractive opportunities appear. With so many trades, it's important that day traders keep costs low — our online broker comparison tool can help narrow the options.
Day traders get a wide variety of results that largely depend on the amount of capital they can risk, and their skill at managing that money. If you have a trading account of $10,000, a good day might bring in a five percent gain, or $500.
Yes, it is possible to make a more than decent living with forex trading. However, in order to do that, you must become a profitable trader. Once you are making consistent profits, and are among the top forex traders, you stand the chance to become a profitable trader with your own funded trading account.
Therefore, the appropriate lot size for a 5000 forex account if the trader is willing to risk 1% per trade would be 10 micro lots. It is important to note that the lot size calculation should be done for each trade.
Risk per trade should always be a small percentage of your total capital. A good starting percentage could be 2% of your available trading capital. So, for example, if you have $5000 in your account, the maximum loss allowable should be no more than 2%. With these parameters, your maximum loss would be $100 per trade.
The higher the leverage ratio, the lower your margin requirement. However, as you're controlling an enormous position size compared to your trading account size when trading on high leverage. A tiny movement of the market against you can lead to high losses and possibly wipe out your entire account.
50:1 leverage (2% margin) is a good way to go. But your risk management doesn't stop there. After you accept trading with the constraint of 50:1, you should only risk 1% to 2% of your account with any given trade.
Scalpers like to try and scalp between five and 10 pips from each trade they make and to repeat this process over and over throughout the day. Pip is short for "percentage in point" and is the smallest exchange price movement a currency pair can take.
KuCoin. KuCoin is a growing cryptocurrency exchange that offers leverage trading on many cryptocurrencies, including Bitcoin, Ethereum, and others. The platform offers up to 100x leverage on some assets and is known for its user-friendly interface and low fees.
Scalping is a waste of time because it involves competing with better-equipped traders and institutions and you need to deal with lots of randomness and noise in the market. Most likely you end up losing money – scalping strategies are rarely profitable. There are better opportunities in longer time frames.
If you want to open a $10,000 short position on BTC with 10x leverage, you must borrow BTC from someone else and sell it at the current market price. Your collateral is $1,000 but since you are trading with 10x leverage, you can sell $10,000 worth of BTC.
With 1000:1 leverage, you can control a $100 000 trade position with just $100, where a 1% positive price change in the market will result in a profit of $1 000 (1% of $100 000). Without leverage, a 1% positive price movement will result in a gain of only $1 (1% of $100).
Micro Lots; Micro lots accounts are the most common and are suitable for beginner forex traders. Here is why; a micro lot equals 1,000 units, which is precisely $0.10/pip movement. With this account, you can deposit anywhere from $100 to $500, which is an excellent amount to start with.
Traders with a $20 account should use a maximum leverage of 1:50 and should only use it when they have a good understanding of the risks involved. They should also consider the size of their trades, use a stop-loss order, and focus on building their trading skills and experience.
With a $1000 forex account, a micro lot size will allow you to trade with less risk and give you more room for error in your trades. A micro lot size on a $1000 forex account is equivalent to trading 0.01 lots or 1,000 units of the base currency.
A financial leverage ratio of less than 1 is usually considered good by industry standards. A leverage ratio higher than 1 can cause a company to be considered a risky investment by lenders and potential investors, while a financial leverage ratio higher than 2 is cause for concern.
5X leverage: $100 x 5 = $500. Thus, we can buy $500 worth of stock with only $100. 10X leverage: $100 x 10 = $1,000. Thus, we can buy $1,000 worth of stock with only $100.
With 5x leverage, only one-fifth of the position size, or 1,000 USD worth, will be withheld from your collateral balance upon purchase of the BTC. With 2x leverage, half of the position size, or 2,500 USD worth, will be withheld from your collateral balance upon purchase of the BTC.
One popular method is the 2% Rule, which means you never put more than 2% of your account equity at risk (Table 1). For example, if you are trading a $50,000 account, and you choose a risk management stop loss of 2%, you could risk up to $1,000 on any given trade.
These lot sizes will allow you to trade efficiently with a small initial investment. Opening a position with a 0.01 lot size, for example, would cost $1,000 or $10 with leverage.
Leverage in the forex markets can be 50:1 to 100:1 or more, which is significantly larger than the 2:1 leverage commonly provided on equities and the 15:1 leverage provided in the futures market.
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