Have you been wondering what is a good leverage ratio for forex? When it comes to the issue of leverage, it is realized that leverage is the capacity to implement the usage of a small item in the effort to launch control over something that is large. As applied to the matter of foreign exchange, which is referred to as forex, this denotes the fact that you can possess a tiny amount of money in your account that will be used to dominate control over a larger amount of money in the forex market. In finance and life, another word for leverage is an advantage.
Leverage definition – What is leverage in forex?
Financial leverage is a process in which an investor borrows money in order to invest in or purchase something, use of debt to buy assets.
In forex, leverage allows you to control much larger amounts in a trade, with a minimal deposit in your account. Using leverage traders can magnify the potential profits and also magnifies the potential losses.
What is leverage in forex trading what is the minimum margin requirement? :
A 50:1 leverage ratio means that the minimum margin requirement for the trader is 1/50 = 2%.
A 100:1 leverage ratio means that the minimum margin requirement for the trader is 1/100 = 1%.
In forex community-recommended forex leverage is usually 1:100. What is a Good Leverage Ratio for Forex? Good leverage for forex trading is equal or above 1:100 such as 1:100, 1:200, 1:500, 1:1000. For professional traders, the bigger leverage is better. This statement is tricky because a lot of financial theorists present the opinion that lower leverage means bigger profitability. Statistics show that beginner traders have lower profitability when using high leverage.
I will give you an example:
Leverage is something like a free candy box. If you give a small kid a free candy box, he/she will eat right away all candies. If you give 1:1000 leverage to beginner trader he will risk too much right away, make huge drawdown, and lose all money. Professionally traders will never trade on margin but it is good when you have the opportunity, and they have bigger leverage.
Stock traders tend to refer to this as engaging in trading efforts on the margin. In the world of forex trading, it is noted that interest is not charged on the margin that is applied. Moreover, it really is of no significance what type of trader you tend to be or even how good or bad your credit is. If you possess an account and are offered margin by the broker, you are allowed to conduct trade on the margin.
The evident benefit of applying the usage of leverage is that you are able to earn a large amount of money with no need for a large amount of your own capital. On the other hand, it is important to realize that this could also lead to you losing a large sum of money when you do apply the usage of leverage when conducting trades on the forex. This is dependent on how smartly you apply the usage of leverage and the level of conservativeness that you set for your risk management process.
You Possess a Higher Level of Control than You May Realize
The thing about leverage is that it allows the market that may seem boring to become more thrilling. However, when your money is out there at a risk, the trill may not always be a great thing. That is why leverage must be used wisely on forex.
Without the application of leverage, traders likely would not see much of a move of ten percent within their accounts in the period of a year. But a trader that applies the usage of leverage is able to experience a move of more than ten percent simply in the period of just a day.
However, it cannot be denied that the usual amounts of leverage are noted as being too steep. It is imperative, as a result, for you to realize that the abundance of volatility that is experienced during trading is linked more with the leverage pertaining to your trade than with the actual asset in consideration.
Amounts of Leverage
It is typical for leverage to be distributed via amounts that are fixed. Such amounts are noted as differing with various brokers. Each broker follows rules and regulations when it comes to distributing leverage. It is common for the amounts to be set at rates of 1:50, 1:100,1:500, 1:1000.
What is maximum leverage in forex trading? The maximum leverage in forex trading that some brokers offer is 1:1000.
The leverage with a rate of 1:50 is based on the fact that for each one dollar that you possess within your account, you are able to conduct a trade that has a value of up to an amount of fifty dollars. Take into consideration, for example, if you placed a deposit of five hundred dollars within your account, you would be allowed to conduct trades on the market that have a value of up to twenty-five thousand dollars.
The leverage with a rate of one hundred to one signifies the fact that for every dollar that you have placed within your account, you are able to conduct a trade that is noted as having a value of up to one hundred dollars. This is a normal amount of leverage that is available for those who possess a standard lot account. The normally required deposit of a minimum of two thousand dollars for the standard lot account would enable the trader to conduct trades up to a value of two hundred thousand dollars.
The leverage that is set at a rate of two hundred to one provides the possibility that for each dollar that is held in your account, you are able to conduct a trade that has a value of up to two hundred dollars. This is considered to be the normal rate of leverage that is provided when someone possesses a mini lot account. The normal deposit requirement of a minimum of three hundred dollars would mean that the trader has the potential to conduct trades with a value of up to sixty thousand dollars.
When it comes to the leverage that is set at a rate of four hundred to one, this means that for each one dollar that you possess within your account, you have the potential to conduct a trade that has a value of up to four hundred dollars. It is noted that there are some brokers that do allow you to access leverage with a rate of four hundred to one if you possess a mini lot account. However, it is important to be cautious if a broker allows you to access leverage with a rate of four hundred to one on an account that is small. If someone places a deposit of three hundred dollars within a forex account and then tries to proceed to conduct trade via the usage of leverage with a rate of four hundred to one could sustain a complete loss in only a few minutes.
The Truth Regarding Professional Traders in Relation to Leverage
It is typical for traders who are professional to conduct trades with leverages that have super low rates. You are better able to protect your money when you keep the leverage rate low in such cases that you make some unforeseen mistakes when trading in. This means that you will yield consistency in regard to your returns.
In general, most traders who are professional tend to apply the usage of leverages with rates such as ten to one or twenty to one. There is the possibility of conducting trades with such low leverage rates even if the broker tries to offer you higher leverage rates. You will need to place more money in your account and be careful to conduct as few mistakes as possible.
Good Leverage Ratio for Forex like 1:100 is just enough for the average trader to use full potential in the trading world.