How Much Leverage Should Forex Traders Use
There is a reason as to why traders love and prefer forex trading than other forms of trading, it’s because with forex trading an individual can avail much higher leverage, compared to other markets. Leverage is defined as the amount of borrowed capital to carry out trading activity and improve trading position. In such a case, a trader borrows this amount from a high leverage forex broker. This way, you get bigger market exposure, with a limited amount of capital.
Leverage helps a trader to trade in bigger lots and maximize the potential of returns and profits. Traders who are less experienced or beginning their forex trading journey, can opt for a lower rate of leverage, for example in a ratio of 50:1 or 100:1. Experienced traders who can easily evaluate all the risks and profits can use higher leverage. Leverage in forex is often considered a double-edged sword and its effects should be evaluated before putting it to execution.
How Much Leverage Is Right For You?
Leverage can be used by traders who want to trade in bigger lot sizes and increase profit. Undoubtedly, leverage is ranked among the most important features of a trading market, as without the presence of leverage forex, traders might have to wait for several months to see a 10% progressive change in their trading positions. Leverage might seem like the perfect idea for you but remember, before opting for higher leverage, a forex trader must consider a few things:
Starting with a lower ratio of leverage is ideal
If you are a novice trader or a beginner, you must always consider choosing a lower ratio of leverage as it will protect your trades from a chance of greater loss. As the forex market is highly volatile, predicting price movements can be difficult for a new trader and therefore, they should not go for very high leverage.
Minimize your loss by using stop loss feature
As a trader, you can opt for the type of leverage ratio, depending on your trading strategy and capital. Novice traders generally go for a minimum leverage ratio, whereas experienced traders willing to take risks with the aim of profit maximization, can go for a higher leverage ratio by choosing high leverage brokers. But even experienced traders must use stop loss as this will limit the potential losses, in case the trade takes an unfavorable turn.
So by now, we are probably clear with the concept of leverage in forex and how it can work in a trader’s favor. There is, however, a certain degree of risk involved with leverage that should not be ignored at any cost. As a forex trader you should not be scared or too overconfident when it comes to building your trade strategies on the concepts of leverage. But leverage should be applied carefully and wisely at all times.