Forex trading with leverage
What if I tell you that you can start currency trading with just 100 USD and make a huge return on it?
Yes, it is possible. You just need to understand the concept of forex trading with leverage and use the facility correctly. It will help you in achieving the desired results.
Leverage makes the game of forex trading more interesting. Both the wins and losses are huge with leverage. Traders have made tons of money and even lost the entire amount by trading leverage.
Forex trading with leverage is risky; however, the amazing benefits make the strategy popular. This blog will help you master the art of using forex leverage with examples. So stay tuned.
Here's a quick look at what you'll read
Leverage is a kind of loan or borrowed money that the broker gives to the traders. It helps traders in controlling large positions with a small amount of capital.
Yes, you can trade in forex with leverage. Most forex brokers offer traders leverage of up to 1:500.
The ideal leverage ratio varies from trader to trader. However, new traders should avoid taking leverage more than 1:50.
Why is leverage called a double-edged sword?
- Get a clear understanding of Leverage and Margin
- Practice with a demo account
- Follow Strict Leverage and Risk Management Rules
- Set Proper Position Sizing and use stop-loss.
- Diversify your traditional capital
- Monitor your trade Positions
- Select a good broker platform
Forex trading with leverage for beginners
Leverage is a kind of loan or borrowed money that the broker gives to the traders. It helps traders in controlling large positions with a small amount of capital.
The concept of leverage is quite simple. For trading and surviving in the financial market, a trader needs significant capital; not every trader can have such big capital.
Therefore, the broker provides their clients an option to trade with leverage. In this way, even with little capital, a trader can open big trades and make big profits.One can get leverage for trading in financial instruments like forex, stocks, indices, cryptocurrencies, etc. However, the usage of leverage in the forex market is quite different.
In the stock market, a trader can usually get a leverage
of around 1:5, meaning with 100$, you can place a trade worth 500$. Meanwhile, in the foreign exchange market, some brokers even offer leverage of 1:500, meaning with 100$, you can place a trade worth 50000$.
However, the bigger the leverage ratio is, the bigger the risk is. Therefore, traders must understand the concept of leveraged foreign exchange trading.
How to use Leverage Strategy in Forex
Forex Leverage Strategy is difficult to implement and execute. Some traders use no leverage, some use a descent leverage, and some use a very high leverage.
The leverage ratio can make a huge difference to your profit or loss. In order to understand how we will see examples with different leverage Ratios.
Trading Capital: $1500
Currency pair: EUR/USD
Position: Buy
A trader with No Leverage Strategy
Entry Price: $1.1000
Take profit: $1.1050
Stop Loss: $1.0950
The trader will not be able to execute the trade with a std lot of 1,00,000 units as it will require $110,000. The trade can only be initiated with a micro lot of 1000 units or (0.01 of std lot), requiring $1,100
In this case, if the price moves in the trader’s favour, the profit will be 50 pips or $5 (0.0050 pips * 1000 units), and if not, the loss will be the same $5.
A trader with leverage of 1:150
Now, suppose the trader is taking the leverage of 1:150. It means with a capital of 1000$, he can open the position of up to $150,000.
Same Case:
Entry Price: 1.1000
Take Profit: 1.1050
Stop Loss: 1.0950
In this case, the trader will be able to execute the trade with an std lot of 1,00,000 units as it will require $110,000, and the trader has a free margin of $ 50,000.
Now, if the price moves in the trader’s favour, the profit will be the same 50 pips, but in dollar terms, it will rise marginally to $500 (0.0050 * 100,000).
Trader with leverage of 1:100
Now, suppose the trader is taking the leverage of 1:100. It means with a capital of 1000$, he can open the position of up to $100,000.
Entry Price: 100,000
Take Profit: 110,000
Stop Loss: 95,000
In this case, if the price moves in the trader’s favour, the profit will be around $ 10,000$; if not, the loss will be around $ 5000$.
Trader with High Leverage Strategy
Leverage Ratio: 1:500
Entry Price: 500,000
Take Profit: 550,000
Stop Loss: 490,000
In this case, if the price moves in the trader’s favour, the profit will be around 50,000$; if not, the loss will be around 10,000$.
In the above example, we have seen three cases in the first case without any leverage while 1:100 leverage vs 1:500 in the next cases.
Here, we see that the elements of trade are similar in all three cases. However, the leverage ratio makes significant changes in the outcome.
The profit amount is increased drastically by using leverage. But leverage is a double-edged sword. The more the leverage, the more the risk and the more the loss.
In the last case, the leverage is extremely high. The loss is equal to 10 times of capital. This means that if the price does not move in the trader’s favour, the trader can lose 100% of the account balance.
Greed is your biggest enemy, especially when you are trading with forex leverage. Therefore, a trader should not use excessive leverage; otherwise, instead of earning a huge profit, the trader will blow the account.
The ideal leverage ratio varies from person to person depending on different factors like trading capital, risk-taking capacity, strategy, etc. However, it is advisable to use conservative leverage to use the strategy effectively.
Amazing tips for using Forex market leverage
Leverage foreign exchange trading has both positive and negative outcomes. Many traders fear using leverage due to its downside.
However, leverage is not at all a bad facility, especially when you know the right way. Here are some tips for trading forex with leverage effectively:
Get a clear understanding of Leverage and Margin
Leverage is complex to understand and use. There are different leverage ratios and strategies. In addition, a trader should have a clear understanding of the margin requirements and trading terminologies for using leverage effectively.
Generally, professional traders who have been working in the market for years use these facilities as it is difficult for beginners to trade leverage. However, with proper knowledge, even novice traders can use leverage to enjoy profits.
Practice with a demo account
With the theoretical knowledge, a practical understanding of forex trading with leverage is necessary. The best way to learn trade execution with leverage is demo trading.
The biggest mistake traders make is they start using leverage on real accounts and lose capital. Therefore, practice is important. Open a demo account using different leverage ratios and strategies with other criteria.
It will help you master the art of using leverage in forex and identify what works for you. Also, the best thing is you are trading with false money, so there is no risk of losing money.
Follow Strict Leverage and Risk Management Rules
First, you need to set some rules related to leverage trading. These rules may be related to your risk tolerance capacity, exit strategy, and leverage ratio.
Once you are done with rule-making, stick to them. Most of the traders failed to follow these rules. However, remember, trading is all about discipline.
Overconfidence, greed, and FOMO can ruin entire trading capital, especially when dealing with leverage. So make sure you follow the rules to have control of trade.
Set Proper Position Sizing and use stop-loss.
Position Sizing is setting the criteria for trades. It includes the number of trades, leverage ratio, risk per trade, risk-to-reward ratio, etc. A trade should dedicate a significant amount to calculating proper position size.
In addition, when you are trading with leverage, never trade without a stop loss. Stop loss is a level at which your trade will automatically close at a loss.
Many traders think stop loss is a negative tool. However, it is not; it saves you from excessive loss and account-blowing. By using stop-loss even in the most unfavourable circumstances, you will not lose more money than you afford.
Diversify your capital
The most common mistake traders make is using the whole capital to place a single trade. However, in forex trading with leverage, diversification is a must.
Let us understand, for example, that you have a capital of 100 USD with a leverage of 1:100. Now if you use the entire capital on a single trade and end up losing; then it blows your whole account.
In the same case, if you spread 10,000 USD and open ten trades of 1000 each. Then, even in unfavourable conditions, you will close at least some of the trades at a profit. Diversification allows you to maximize the utilization of your trading capital so spread your capital.
Monitor Positions
One of the key cons of forex market leverage is the possibility of account-blowing. The best way to save capital is to watch the trades continuously and make changes according to market conditions.
So, dedicate a significant time to monitoring your trades. You can also go for automated trading software or tools to keep a watch on the market. These tools will automatically close or adjust the trade on your behalf based on the predefined rules.
Select a good broker platform
Your broker will provide you with leverage, so selecting the right broker is essential. The offered leverage ratio and rules of leverage usage depend on the broker-to-broker.
In addition, government bodies and financial authorities have set some guidelines for broker platforms regarding the leverage facility. So make sure that the broker follows these rules, offers risk management tools, and a decent leverage.
Generally, traders go for brokers with high-leverage facilities. However, it can be seen as a red flag. Forex trading already involves a significant risk, and high leverage further increases it. So, keep these things in mind while selecting a broker.
Wrapping Up
The major problem a trader faces when starting a trade is a lack of funds. Forex trading with leverage is a great way for beginners to get funds from the broker.
Leverage has both positive and negative aspects. It can double your account or blow the entire account. However, the outcome depends on your approach.
Emotion management, rule-based trading, risk management, and position sizing are four pillars of leverage trading. With these, one can maximize the potential returns and trade effectively.