When choosing the best leverage Forex beginners should use in trading, it is important to understand how it works when generating profits from small currency pair price changes. Leverage is the sum you borrow from a broker. It provides an opportunity to increase a trading position with a value that exceeds your cash balance.
The main challenge here is to decide on the best leverage to use in Forex. Selecting the right amount will define how risky or profitable your trading can be.
The majority of novice traders look for platforms offering leverage-based trading opportunities. They consider it as a chance to make high profits in a shorter time frame. At the same time, they forget about certain risks that are often associated with this particular modality. Before choosing the right amount, one should have a clear understanding of how specific concepts work in reference to funds management associated with leverage trading. Those concepts generally include:
When you are absolutely sure about how all of the above-mentioned work, you can select the best leverage to use in Forex.
Leverage brings increased risks. They mainly refer to losing and recovering the initial deposit. Let’s have a look at the main challenges beginners can meet.
The first and foremost challenge is the risk of losing a deposit. It refers to emotions that take novice traders to a psychological trap. This happens when selecting higher leverage, which means a bigger sum to borrow from a broker. Always keep in mind that a bigger sum does not generally mean more profit opportunities. It is also associated with more obligations you need to follow. You are supposed to have enough funds to cover potential losses. Otherwise, it will be hard to avoid Stop Out.
Bigger leverage means you can open more positions at a higher price. The value of assets you trade is several times higher than the number of real funds you have in the balance. As a result, the risk of enormous losses occurs every time you open a new order. Besides, it is very hard to build a structure with several open positions at a time.
As stated earlier, the chances of losing are high. Some beginners still hope that higher leverage lets them get back to normal conditions faster. They expect their balance to return to the previous size. They forget about the fact that loss compensation is possible only at higher profitability that is not guaranteed.
Example: let’s say, you trade with $100 on the balance. When you lose $50, you need to profit 100% to get your 50 bucks back. Can you really make it considering previous losses?
The paradox here is that trading with bigger leverage reduces the risk of market liquidity. However, this is possible only when the trading volume is stable.
The only way to trade with lower leverage is to have a bigger deposit. However, the majority of novice traders look for options with minimum cash to invest. On the one hand, trading with $100 comes with 10:1 leverage letting you open not more than 10 positions at a time. As for the optimal amount, experts recommend starting with 1,000 USD and the 100:1 leverage. At least, having 100 open positions simultaneously complies with traditional risk-management concepts.
Beginners need to follow several simple rules that are widely accepted in the Forex market. They involve:
Professional Forex traders usually choose the leverage level that makes them feel comfortable. This also depends on the approach and the trader’s personality. If you are a conservative investor looking for lower risks, 10:1 leverage looks like the best option. In the end, one should never ignore time-tested risk and money management tools.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.