Have you ever wondered how to trade with forex leverage? The function of leverage in forex is to increase the size of your capital so that you can open higher-than-normal lot trades because one lot equals $100k (one hundred thousand dollars). It is difficult for retail traders to have this amount of money to open one lot, so leverage was added to Forex so that you can double your capital and open the lot that suits you. The higher the leverage, the more you can open larger lots.
Guide to Using Forex Leverage
1 – How Leverage Works in Forex Trading
Leverage is one of the most important tools that you may need at the beginning of your Forex journey. Without it, you will not be able to open large lots and thus you will not be able to achieve appropriate profits.
Forex leverage is money that liquidity providers provide to traders so that they can trade with amounts greater than their deposits. This money is virtual and not real. The liquidity provider will not give you money in your hands, but it is only a virtual tool.
This tool consists of different ratios and you can choose the appropriate leverage for you through your broker. For example, you may find a broker that offers you leverage starting from (1:50, 1:100.. etc To 1:3000)
For example, if you choose a leverage of 1:1000, this means that if you deposit $100, your capital will double to $100,000 (1000 leverage x $100 = $100,000) You can now open one standard lot in this case.
The role of margin in leveraged trading
The margin is closely related to the leverage. The higher the leverage you choose, the less money the broker keeps as insurance. This is normal for the broker, as he keeps additional money as insurance for the trade. He does not take this money, but this process occurs to ensure that you can bear the losses of this trade.
For example, if you choose a low leverage, the broker will ask you for a high margin, but if you choose a high leverage, this percentage will decrease and you will be asked for a small insurance amount.
Advantages and Risks of Leverage in Forex Trading
Advantages and Risks of Leverage
Leverage has advantages and Risks Too. I am not talking about whether you want to use leverage or not, but choosing the leverage, whether it is High or small, Because of course you must use leverage and if you want to trade without leverage in this case you will make large deposits to bear the value of the lot which is $100k
For example, as we mentioned earlier if you choose a small leverage, the broker will ask you to reserve a larger amount as insurance for your account to ensure that you can bear this loss. However, if you choose a High leverage, this amount will be reduced. You may see that this choice is the best, and in fact it is the best, but it has some drawbacks.
When you choose a High forex leverage, it will allow you to open large lots and you will not be restricted to a small number of lots. The broker will ask you for a small insurance amount for the trade, but this choice may be somewhat risky because when you open a high lot, you may lose a large part of your capital. The leverage will allow you to open a high lot and will not prevent you from doing so.
The opposite is also true in the case of choosing a small leverage, the leverage will prevent you from opening a large lot trades, but if you are going to use a stop loss in this case, in my opinion, it will not be a problem for you, but if you cannot control your behavior during trading, you can choose a small forex leverage and it will help you in that.
The role of Leverage in Risk management
When the broker holds an amount as insurance for the trade, this does not mean that you will lose this money if the price reaches the stop loss, but in this way, he will protect your account from losing a lot of money in the event that the stop loss is not set.
Forex leverage is an important part of Risk management and is also a hidden stop loss. It protects your money from losing a lot of money in case the price reverses against you more than necessary.
But if a stop loss is set and the stop loss is, for example, $500, but the trade will be closed automatically if the loss reaches $400 because the leverage used is low, the price will not continue to reach your stop loss and the trade will be closed at a loss of $400, so you will get what is called a margin call.
The margin call is a trade closure because the broker’s reserved amount is about to run out. In this case, the broker will close the trade automatically but he may give you advance notice before doing so. During this time, you can increase the leverage or leave it as is.
2 – Common Forex Leverage Mistakes and How to Avoid Them
Common Forex Leverage Mistakes
There are mistakes that beginner traders make when they open a new trading account, which is choosing the highest forex leverage available at the broker.
The correct thing is to choose a suitable leverage for you compared to the value of your deposit, and before that, you must open a demo account with the same leverage that you will choose in the real account because in the demo account, you test everything and not just the strategy. You will choose the same leverage, the same account value, and the same account type.
Misjudging market volatility
One of the mistakes that you may make is misjudging the current market momentum. You may open a high lot thinking that the market will move at a slow pace, but the time you open the trade coincides with strong news. In this case, the price may move in the opposite direction to the trade you opened, and you may lose more money than the broker has reserved for you.
Broker or leverage will not protect you in such a location, as the price slippages that occur during news times may cause you to lose your entire account, but choosing low leverage can help you limit the opening of a high lot, and in this case, when a price slippage occurs, you will have time to close the trade or bear the reversals that may occur at such times.
Of course, knowing the news-times is very important so that you do not put yourself in such situations. You can find out the news times from the Forex Factory economic calendar Here.
Not using Stop-loss
As we said before, leverage may protect your account from loss in the event that you do not set a stop loss, but relying on this part completely without setting a stop loss is completely wrong. because the stop loss is the basis of Risk management.
Because when You set the stop loss you will know when the trade will close at a specific area and you will determine the amount of loss of course, but leaving the matter completely until a margin call occurs will expose you to uncalculated losses.
But the stop loss will not protect you when price slippages occur at news time because at these times the price moves quickly and does not respect the stop loss or margin call.
Emotional Trading with Leverage
Your emotions may control you if you choose a high leverage such as 1:3000. This forex leverage is very high and may tempt you, right? When choosing a leverage of this size, you may open high lot trades hoping to get a much larger profit.
When this happens, you will ignore the Risk management and you will probably not set a stop loss and your trading strategy may be ignored. Choosing the right forex leverage will help you make logical decisions so that your emotions do not control you while trading and you will lose control in that case.
Lack of Experience with Forex leverage
It is natural that when starting trading, you should choose Low forex leverage, as it helps you limit losses. Not knowing enough about this aspect may expose you to losses.
Because the different leverages available at the broker are available to different traders, whether experienced, beginners, or intermediate. If you decide to choose the largest forex leverage available at the broker and you do not have enough experience that you may expose yourself to when making this decision, you may lose your money and expose yourself to opening large lots at the beginning.
3 – Forex leverage and Trading Strategies
trading strategy
You can choose the appropriate leverage for you based on your strategy and trading style. You must first determine your trading style, whether you are a day trader, scalper, or investor, for example.
Scalper
The scalping trader opens many trades during the day and on different pairs and it is possible to open more than one trade at the same time in order to be able to do that he must choose a large leverage but he must place the stop loss because if a margin call occurs in one trade, all or most of the trades will be closed because the account will not bear all this loss and will exceed the amount that the broker has reserved for you in this case
Intraday trader
As for the daily trader, he may open one or two trades per day, and he may not open any trades during the day, in the absence of a suitable opportunity to enter the trade. This trading style allows him to choose a medium forex leverage starting from 1:200 to 1:500. This is a suitable forex leverage for him, of course, taking into consideration the stop loss.
Investor
As for the investor, he may leave his trade for months and possibly a year, and he may open trades with a small risk and a large return. This type of trader usually chooses a very small forex leverage because he does not need to risk most of his capital and the lot he uses is very small compared to his capital.
The appropriate forex leverage for investors is 1:50 to 1:200. You may see some investors who do not use leverage and trade with their capital only. In fact, they deposit huge amounts of money that qualify them to dispense with leverage completely.
Why don’t all brokers offer high leverage?
Most brokers offer leverage, but leverage varies from one broker to another. You may find a broker offering leverage of up to 1:3000, and another may offer 1:50 as a maximum, The reason here is the licenses that this broker has obtained, and based on this license, it offers leverage.
There are countries that impose severe restrictions on Forex trading, specifically on leverage, and companies that have licenses in these countries are subject to their laws and therefore provide leverage that suits these laws, Whether this Forex leverage is large or small.
You do not have to join a broker that offers forex leverage that is not suitable for you. It is better to look for a broker that has strong licenses and at the same time offers good leverage to suit your strategy and trading.
Conclusion
Forex leverage is a very important tool in trading and you should know about it before you choose it. Many traders choose the maximum leverage available at the broker without knowing the appropriate leverage for them, and this is a mistake. You should know what leverage is appropriate for you and what is the margin call in order to protect your account from unwanted losses.
