Leverage in Forex is the ratio of the trader’s funds to the size of the broker’s credit. In other words, leverage is a borrowed capital to increase the potential returns. The Forex leverage size usually exceeds the invested capital for several times.
The size of leverage is not fixed at all companies, and it depends on trading conditions provided by a certain Forex broker.
So, Forex Leverage is a way for a trader to trade much bigger volumes than he would, using only his own limited amount of trading capital.
Nowadays, due to margin trading, each individual has access to Foreign Exchange Market which is referred to speculation on the market by credit or leverage, provided by the broker for a certain amount of capital (margin) that is required for maintaining trading positions.
What is the Best Leverage size
The answer to the question is that, it is hard to determine which is the right leverage level.
As it mainly depends on the trader’s trading strategy and the actual vision of upcoming market moves. That is, scalpers and breakout traders try to use high leverage, as they usually look for quick trades, but as to positional traders, they often trade with low leverage amount.
So, what leverage to use for Forex trading? – just keep in mind that Forex traders should choose the level of leverage that makes them most comfortable.
Tickmill offers leverage from 1:1 to 1:500. Usually in Forex Market 1:100 leverage level is the most optimal leverage for trading. For example, if $1000 is invested and the leverage is equal to 1:100, the total amount available for trading will equal to $100.000. More precisely saying, due to leverage traders are able to trade higher volumes. Investors having small capitals prefer trading on margin (or with leverage), since their deposit is not enough for opening sufficient trading positions.
As it was mentioned above, the most popular Leverage in Forex is 1:100.
But what’s the problem with high leverage? – Well, the high leverage, besides being attractive is very risky too. Leverage in Forex may cause really big issues to those traders that are newcomers to online trading and just want to use big leverages, expecting to make large profits, while neglecting the fact that the experienced losses are going to be huge as well.
while leverage can increase the potential profits, it also has the capability to increase potential losses as well, that is why you should choose carefully the amount of leverage on your trading account. But it should be noted that though trading this way require careful risk management, many traders always trade with leverage to increase their potential returns on investment.
It is quite possible to avoid negative effects of Forex leverage on trading results. First of all, it is not rational to trade the whole balance, i.e. to open a position with the maximum trading volume.
That’s not all …
Apart from that, Forex brokers usually provide such key risk management tools as stop-loss orders that can help traders to manage risks more effectively.
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Raymond is a professional currency trader with experience of 4 years trading the financial markets. Certified Risk Manager and Contributor at profxtigers.com
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