Do you know that leverage is often called a double-edged sword?
Well, this is because it plays a crucial role in your trade success or failure. Many top traders also believe that small traders are likely to lose their trading accounts due to ignorance of leverage. Financial market trading relies on discipline, skills, and efficient money management.
As a beginner, you need to understand leverage. This is to curb greed and make you profitable in the long run.
Since you are here, this guide would highlight the best forex leveraging for beginners. So we would start from the general to the more specific knowledge about forex leveraging for beginners.
What is leverage?
Simply, you can look at leverage, as the money borrowed from a broker. It can be defined as the ability to leverage your forex balance. You can see it as the power of borrowing. In forex, it is seen as entering a larger position with a smaller amount of money.
Literally, a broker borrows your money to place a trade. So, you are strongly advised to leverage properly.
Like a double-edged sword, it can make or mar your trading career. Therefore, to avoid incurring losses, you should learn proper leveraging.
Because of this, you must learn risk management. It will help you calculate your leverage. Nonetheless, there are laid down traditional leveraging forex traders used in trades. So, here is a rundown of the common ones;
- 1:1000 and so many others.
These leverage options vary and they solely depend on your broker’s offering.
Now let’s use a real scenario.
If you have N10,000 to manage an N1,000,000 trade, then your leverage is 1:100.
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How do I calculate Forex Leverage?
You don’t need a calculator to know your leverage. This is the best answer for those who need a leverage calculator or don’t know their leverage option.
Many brokers often need you to select a leverage option on account opening. Well, you should rest assured it is simple math.
Firstly, you need to know your trading margin. So, just head up to your trading platform. You would get this information from the trade list tab. Now, here’s how to calculate your leverage.
Leverage = 100 ÷ margin percentage (i.e 1/margin)
Say your trade margin is 0.1, The margin percentage would be 10%
If the margin percentage is 10, then leverage would be 10.
Because leverage = 100/10.
Let’s look at another example.
Say, your trade margin is 0.0005
Your leverage would be 1/0.0005 = 100/0.05 = 2000.
So, your leverage is 1:2000
Take a second look at the examples above. It was intentional to make one low leverage and the other high. So which style is the best forex leveraging for beginners?
The next section would pinpoint the benefits and drawbacks of high Leveraging.
Benefits of High Forex Leveraging for Beginners and Experts
1. Enter a Trade with a Low Capital
With leveraging many small traders can now place trades. The leveraging option has stripped the privilege of trading off the rich. Before now, only people with a fat bank account could place trades. Over time, things changed. With the right setup, you can make profits with a small amount of money like N10,000.
2. More Returns for You
With a well-thought-out trading strategy and strict risk management, massive returns are assured. With these, you can 10X your forex capital with leveraging.
3. Little Worries about Interest
Unlike every other loan offer, leveraging is interest-free. There are no extra costs and hidden charges. With this simple fact that forex leveraging attracts no interest, you can be in for potential returns.
The Downside of High Forex Leveraging for Beginners
Reading through this post – or whether you skimmed, you would have seen the term, ” Double-edged sword “. High leveraging has two sides; the pro and the con.
Even though we just explained the benefits of high leverage, it also poses potential risks to your trading account.
Let’s look at these 3 common disadvantages high leveraging can cause.
1. Expect High Cost on Transactions
Even though leveraging is interest-free, the cost of processing a high leveraged trade is higher. So the higher your leverage, the higher the cost.
Let’s say your trading portfolio is worth $500, and you buy EURGBP with a 5 pip spread at 0.10.
Your leverage is now 50000/500 = 1:100
The transactional cost is calculated thus;
Spread X Lots X pip
Therefore: 5*5*1 = $25
That is a 5% deduction from your account balance. With an initial balance of $500, and a transaction cost of $25, that’s a high fee to consider.
2. High Probability of Losses
Just like how you can get more returns with a highly leveraged trade, that is how your account become open to potential blows.
You should also know that the high volatility in the forex market poses great risks for unskilled traders. When the market moves against your trade setup, your profit will be affected. Therefore, high forex leveraging for beginners can severely affect their portfolio.
So, before you decide to use this approach, carry out proper analysis of the market and currency pair.
Choosing the Best Forex Leveraging for Beginners
Every day, professional traders follow strict methods and guidelines. These methods are to ensure long term profitability. For you to become a successful trader, you need to climb on the shoulders of those before you – oh I mean, learn from the experts.
Your honest self-assessment is required and can be achieved by meticulously answering certain questions.
Doing this would help you pick a personal leveraging method that works. Let me show you 3 pointers that would help;
- Ensure your leverage is very low
- 1% or 2% is the perfect position
- Always use break-even as a form of protection.
Nonetheless, the unique trading strategy of a forex trader determines the leverage ratio.
To discover your strategy, you should ask questions such as: am I a scalper, swing trader, day trader? What triggers my entries and exit? Am I conservative or aggressive? What determines my position sizing?
Once you have clear answers to the questions presented, you will have a clear understanding of what leverage ratio would work best for you.
Regardless, total beginners are advised to be conservative with their trades. The best forex leveraging for beginners would be 1:10 and 1:50. With this ratio, you tend to minimise your losses. It also ensure your emotions have less impact on your trade.
In addition to the above, you must use stop loss and break-even in all your trade setups. This advice is because the forex market is volatile and can easily cut your pips. So, your main aim should be to take profit and reduce losses.
You should always avoid greedy moves and protect your capital. With your capital secured, the market would constantly present another trading opportunity.
A quick way to lock in profit is using break-even. Break-even refers to the act of moving your stop loss to your entry point. That way the profit you have gained so far is secured.
Break-even helps keep your emotions off your trades. And with a clear head, you can make accurate analyses for more trade setups. On the flip side, tradkng with emotions is a quick way to lose. Follow the market and not your emotions.
As a beginner, your trading style, size, and setup are important things to be kept in mind when calculating your leverage. You should endeavour to ask yourself discovery questions in other to understand what works for you.
Nonetheless, we have concluded that the 1:10 and 1:50 ratios are the perfect forex leveraging for beginners.
At this point, I hope you understand how to calculate your leverage ratio, and the perfect leverage you can use.
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