Leverage in Forex for beginners

Leverage in Forex
Leverage in Forex

Do you know about leverage or leverage in Forex? Well, almost all of us have heard about leverage before; we may not realize that we have used leverage. Have you ever used credit cards, bought houses or even cars before? If yes, you have used leverage. When taking out a mortgage to buy house, the mortgage serves as a collateral and this works the same way as leverage in Forex.

The creditor will have to take the house from you when the loan is due. Most times, you will be given only 80% of all the worth of your property while they are holding 20%. You can use the borrowed money to buy a house that you could never afford without borrowing from the bank.

This also goes with Forex trading. Start by borrowing enough funds to perform trading and generate profits for yourself. After getting the funds from the broker, your collateral will be the current worth of the exchange pair. If you are able to receive $10,000 from your broker, there will be a payment of 5% for trading like the EUR/USD. It shows that you should deposit up to $500 in your online trading account before thinking of starting a transaction. However, with $9,500 from your broker, you will start trading with $10,000. 

Best leverage in Forex

The greatest and best leverage in Forex to use cannot be decided so easily. This depends on what the upcoming market holds and the type of strategy and tactics you want to use as an investor or a Forex trader. With Forex thumb rule, you should choose a smaller leverage and keep your trade open for some time. This means that while you are expecting significant movement in the market, long opening positions are better and they will help. However, you must escape being “Stopped Out” to maintain your position even with market fluctuations.

In addition, you are bound to make more profit within such a time when your position is opened for a few minutes. Moreover, you must go for the highest possible leverage to get an increased profit. You will get massive profit within the shortest period with this. 

This shows that Forex leverage ratio depends mainly on the strategy the investor or the trader is using. Positional traders who need quick trades go for low leverage. They start with 1:5 and move up to 1:20. Traders can use higher leverages like 1:50 to 1:500 when scalping. 

Smallest leverage in Forex

The smallest leverage you can get in Forex is 1:5. This is usually offered by brokers who will like to encourage newbies entering into the Forex market. For beginners, you should go for brokers that provide small leverage in Forex trading.

Highest leverage in Forex

The highest Leverage you can get in Forex can be as high as 1:500. Leverages as high as this is available for experienced investors because any slight mistake means a loss of enormous funds. FBS is one of such brokers offering high leverage in Forex. Contact them or research about others who are offering such high leverage for investors.

How leverage in Forex works

Assuming you send 1,000 USD into your trading wallet, it shows that you have one lot on your Meta-trader 4 application. This is possible because one lot is approximately equal to 100,000 country currency units. Since it is possible to trade with smaller lots, you can do that from your account without leverage. However, if you are looking for about 2% returns per trade, he should be expecting 20 USD in return. This is the main reason why most traders or investors are looking for monetary leverage in Forex.

An investor that funds his account with 1,000 USD and who will be interested to perform bigger trades could register with a broker that can provide leverage of about 1:500. Once you get this leverage, you can create up to 5 lots in USD. Such a trader with 5 lots will have an account with about 500,000 USD in his account.  It will now be possible for such a trader to trade with 500 times what he has in his actual account. Instead of using 1 USD, such a trader will be using 500 USD. Don’t forget that there is also a possibility of losing funds as gaining funds.

READ ALSO: Over Trading in Forex

How to leverage in Forex

Business corporations and investors are both in need of leverage in Forex. Both of them are using leverage to boost their profits. Investors make use of leverage to boost the returns they will get on their investments. These investors will leverage their investment by making use of different instruments like margin accounts. Companies, on the other hand, are financing their assets with leverage in Forex. This simply means that instead of companies making use of stock to increase capital, they will rather make use of debt funding to make an investment in business operations. 

Calculating leverage in Forex

There is a general formula available for the calculation of the actual leverage in Forex trading. The method is explained below.

For leverage

= 100/ Percentage of Margin

= 1/Margin

If margin = 0.02, this shows a margin of 2%.

Leverage will now be equal to 1/0.02 or 100/2 = 50

Advantages of leverage in Forex trading

1. Larger profits – A higher leverage will lead to a larger profit gain.

2. Low capital trading – With no leverage in Forex, rich people are the only people who would trade and make large returns. However, with leverage in Forex, we can all trade with low capital and make massive profits.

3. Interest-Free – You will not pay any amount on the money you borrowed from brokers. You have nothing to worry about because you won’t have to pay any interest.

Disadvantages of leverage in Forex trading

1. An Endless Liability – You must pay this leverage in Forex before the day runs out. 

2. Heavier Losses – There is a higher possibility of losing money while trading. You should be more careful when trading with larger leverages.

Using leverage in Forex

When you have leverage in Forex, there will be a lot of profit for you especially when there are fluctuations between two country currencies. As an investor, the highest leverage you can obtain is the highest available in the market. Before you start making use of this, you must request for funds from the broker. Such a broker could also help the trader to handle his/her Forex account.

It is compulsory to create a margin account after selecting the perfect broker for your leverage. You may get about 1:50, 1:100 or more leverage. The best amount you could get depends on the broker you are using and their current position. With 50:1, you will have a margin requirement of 1/50 = 2%. This means that you must have about 2% of the trading amount you want to use. A leverage of 200:1 will be needed for positions that are up to $50,000.

Lot size and leverage in Forex

In case you don’t know, lot size is said to represent size of your position in Forex trading. We have different lot sizes in Forex. However, the unit of the standard lot rounds up to 100,000.00 of the country currency you will like to trade. However, when this and margin are taken into consideration, you must have some margin in your account. With this, you should get a leverage of about 1:50. There are different lot sizes that brokers are using and this include mini, micro and the nano lots. 

Another factor that affects the pips is the type of country currency pairs you want to trade. Since you know this, let’s learn about the formula to use for the calculation of any pip value of currency you come about. The formula for the calculation is as shown below. Once you get this method, you can incorporate it into any currency pair to be traded.

USD/JPY with the present price of 110.45;

100,000 * (0.01 / 110.45)

= $9.05 per pip

EUR/USD with the present price of 1.1250;

= 100,000 * (0.001 / 1.1250)

= $9.99 per pip (approx. $10 per pip).

Please note that since the result of the second instance is already stated in USD, we have a slight change in the formula. However, the method changes from 0.001 to 0.01 at the start of the USD/JPY solution since pip takes the second decimal. Practice more to get this concept.

Conclusion on leverage in Forex trading

This comes in two sides in trading – that is, care must be taken when trading. This shows that as you are making huge profits, there is a high probability that you can also lose your trading funds. There are numerous risks attached to this type of trading but market risk is one of the most apparent. You must understand everything about leverage in Forex right before the placement of your first trade. 

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