How Much Leverage Is Right for You in Forex Trades ?
How much leverage is right for you in forex trades is quite difficult to standardize, The best approach is to estimate it, basing on a percentage of your total investment capital to make it easier to understand and calculate it. The leverage size can help you to increase your profits and wealth faster, but it also carry a higher risk or cost when your prices anticipation are wrong since your potential losses also increase exponentially making this calculation a pivotal part of any trader money management plan. Professional traders always recommend to have the leverage below the 50:1 or 2% of your account balance.
What is Leverage?
Leverage is your credit line to trade with more money than your account balance or deposited amount of money in your account. In other words, leverage is a credit given to you by your broker to increase your investment capital whenever you consider or need it. The leverage used as collateral your deposited balance and it can be anywhere from 2:1 up to 400:1, which mean your broker allows you to increase your trading capital from 2 times more than your account balance to up to 400 times it. In the USA the maximum leverage for Forex trading is 50:1 is 50 times more than your account balance.
Understanding How Much Leverage Is Right for You in Forex Trades
Forex trade are done in lots with 3 different sizes: Standard lot 100000 Units, Mini lot 10000 unit and micro lots 1000 units of the quote currency.
Exchange rates variation are expressed in pip, which is the smallest price variation, it can be in the third or fourth decimal, e.g., EUR/USD 1.1200 a price increase to EUR/USD 1.1210 will be a 10 pips increased. Therefore a price increase of just a full cent can represent a 100 pips increased. EUR/USD 1.1300
Successful forex traders take less than 50:1 leverage, the possibility to raise your capital faster can make you take risky choices, and the forex trade is a highly speculative market in which prices can drops sharply in seconds without a real economical reason. No matter how safe a trade looks, professional traders never risk more than 10% of their investment capital on it. Successful forex traders always consider the leverage final cost if the price drops or their future exchange rate estimation are wrong to estimate this 10% investment stop point.
New forex trader should use from 10:1 to 25:1 leverage. When you are a new forex trader, you have to reduce your risk to the maximum. High leverages are the first reason for forex trader failure, and account wipeout since in a single wrong trade with high leverage can cost your total account balance or investment money.
In a nutshell, how much leverage is right for you in forex trades must be evaluated during your money management plan elaboration. A high leverage brings a higher financial risk, with the potential to empty your trading account after an incorrect estimated forex trade. The real leverage cost can be calculated by multiplying the leverage for the estimated pip price decreasing variation as a risk level measurement. The most recommendable leverage for forex trading is around 50:1 or 2% of your total investment capital. New Forex trader should start with less than 25:1 or 1 % leverage until they anticipate the future exchange rate correctly in more than 85% of his forex trades.