Whenever a forex trader or financial expert starts explaining forex leverage for beginners, it tends to get a little too complicated for most people. Forex leverage or trading leverage is one of the most controversial tools in the investment world, and for good reason. Leverage is often misunderstood and misused, which leads to new traders getting a bad first-impression when trading on the foreign exchange. Once bitten, twice shy.
Many newbie traders see constant margin calls in the first month because of low leverage. They lose motivation and confidence and never try again, deciding that forex trading is too complicated or without the possibility of profit. Both of those assumptions are inaccurate.
Trading only seems overly complicated in the beginning, but then, doesn’t almost anything of great value or potential. Learning how to use a forex trading platform and keeping your margin and leverage balanced can be tricky, but after a few hours every day you’ll soon realize that the basics required to trade are not complicated at all. One great way to see how leverage affects margin is to start trading with the Exness demo account. It’s a great way to test different leverage settings and see how your margin is lower when leverage is higher.
How leverage affects margin
Margin is a protective line the broker creates to provide you with the option not to lose more than you’ve invested. If you make a bad investment, which happens, your leverage-multiplied investment will start to drain your trading account. When your funds approach a low level, you’ll get a margin call from the broker prompting you to deposit more funds. If you don’t want to add more funds you don’t have to. You can simply close the order manually and take the loss. Otherwise, the software will eventually and automatically stop your losing trade when you reach margin and hit zero funds.
Yes, leverage trading on the forex market has never been easier than today, but before you can start thinking about your account balance, you need to figure out your preferred trading leverage ratio.
Some traders swear that low-margin high-leverage is a gift that can give low-budget traders a shot at the big time. Others say it’s pure evil and responsible for the demise of most newbie traders. Let’s get to the bottom of this dilemma and find out if low-margin high-leverage might be a trader’s best friend or just a risky way to overextend your budget.
Forex leverage for beginners
Whenever you sign up for a trading account, you’ll often be prompted to decide how much leverage you wish to have access to. But what is forex leverage in forex and how does it affect margin? First, let’s talk about what it isn’t. It is not a loan. In the past, new and small brokers had a habit of describing leverage as an interest-free loan that allows you to open a significant position without making a large deposit. That’s only half-true.
The very best way to describe forex leverage is by using a trading example. To keep things simple, we will skip the Ask/Bid calculation and not have a spread.
Trading without Leverage
In this example, the leverage ratio is set at 1 leverage or 1:1. In other words, no leverage. Let’s say a trader has $100 in his forex trading account and he’s prepared to risk it all.
- The trader buys a $100 CFD of ABCXYZ (without forex leverage) at the price of 1.0000.
- The price of ABCXYZ suddenly rises to 1.0200 so the value of the contract increases to $102.00. A rolling profit of $2.
1 Leverage (1:1) means you get no increase in the investment positions you make. This means a higher deposit is needed to access higher profit potential. It also means that a dramatic shift in the forex market won’t wipe out your account balance so quickly. The pros and cons of 1 leverage are clear.
Trading with Leverage
Let’s factor leverage into the trade and see what happens. At exactly the same time, another trader makes the identical trade, but she has a leverage of 1:50.
- She risked $100 just the same, but her open position was multiplied to $5000, thanks to forex leverage.
- Likewise, the price increased to 1.0200, which made the leveraged $5000 open position increase in value to $5100. The profit on the leveraged position is $100.
In both cases, the amount of money risked was $100, but the profit was fifty times greater in the second case because of leverage. So what’s the catch?
The thing about forex leverage nobody likes to talk about
Let’s modify the above example to demonstrate the dangers of forex leverage. This time the price of ABCXYZ is going to go down.
The trader without leverage sees the price of XYZABC fall to 0.9800, but he’s not overly concerned. His open order is still worth $98.00.
Alternatively, our leveraged trader makes the same $100 order with 1:50 leverage. The order is holding a market position of $5000. When the ABCXYZ price falls to 0.9800, the leveraged position rapidly falls to $4900 in value. A loss of $100. Because of forex leverage, the trader lost the entire $100 investment in a very short time.
If your trading account is well funded, you can ride out temporary fluctuations, especially if your leverage is low. But if the price goes the wrong way big time, you can lose everything in minutes.
The best forex leverage for trading asset types
Forex traders have personal preferences as to which assets are better investments. Those who are trading with a risk management system tend to keep their leverage ratio low. Risk management is simply a set of predetermined rules that will limit how you invest on a daily basis. Most forex trading professionals insist that consistency is key, and risk management is recommended.
Having said that, there are some assets in the foreign exchange market that have very high trading volumes, which tend to limit the daily price moves. Others have low liquidity and they react energetically. Let’s look at the more popular one and see if you can figure out which is the best leverage for $100.
Major currency pairs
A major currency pair always includes USD in the pairing. EURUSD (Euro Vs US Dollar) is by far the most traded asset in the world, and therefore has the highest trading volume from traders across the globe. If a major investor decides to sell off their EURUSD, the pair will show a drop in volume and value, so the price will fall. But, since EURUSD is so massively traded, the selloff is only a tiny fraction of the volume, so the price will only fall slightly.
So what is the best forex leverage for beginners wanting to trade EURUSD?
Low price movement means low profits and losses. If you want to trade just for entertainment value, low leverage in forex is always a good idea, but if you are looking for a higher risk/reward then you can choose a higher leverage ratio.
Minor and exotic currency pairs
When it comes to minors and exotics, the most appropriate best leverage for beginners is definitely low. Forex trading these two types of forex pairs presents a much higher risk of losing. Margin requirements and high leverage only multiplies the risk. Since trading volumes are low in comparison to majors, large investors can have an effect on the market, so prices are much more volatile.
Is it a good idea for forex traders to use leverage?
The benefits of forex leverage are very tempting. An Exness trader can get up to 2000 leverage (1:2000), and in some cases even more.
To put that into perspective based on the trading example above, the price rise of ABCXYZ to 1.0200 with a high-risk leverage of 1:2000 would have generated $4000 profit from a $100 investment. But the traders’ funds would be completely wiped out in seconds by an ABCXYZ slight price fall to 0.9995.
When using high leverage in forex on a well-funded trading account, tools such as Stop Loss, Take Profit, and Trailing Stop are strongly recommended to reduce margin call. More so, during volatile times such as fundamental news releases, avoid using high leverage, or wait till the dust has settled.
Exness allows you to open multiple forex trading accounts from a single signup, so you can be selective about which leverage best suits the symbol you are targeting. Make a few test trades on both low and high volatility pairs using the free demo account. Once your real account is approved and ready for trading, you’ll have a good idea of how much to trade and at which forex leverage.
Keep your financial goals low for the first few weeks. Find a balance. You’ll want to have sufficient leverage to produce interesting profits when your forecasts are right, but not too high that an unexpected price fluctuation will zero out your margin. Mastery won’t happen overnight and the risk of losing your entire account balance is high in the first few weeks, so be conservative.
It is recommended that you immerse yourself in the financial world. Don’t switch off the news after the main stories. Listen to the business analysts that talk about the economy, even if you don’t understand what they are saying. It’s a great way to passively learn.
Exness academy provides a quality selection of educational videos you can check, and Youtube is overflowing with professional traders who are ready to share their knowledge and experience.
Like riding a bike, driving a car, or playing a new video game, it gets easier with time. What starts as a stressful engagement can become an enjoyable activity that also offers the obvious attraction of being profitable.
Think of it as an exciting hobby that offers great potential in the future. Enjoy the thrill of the win, battle against every loss, and learn every single day. In no time at all you’ll be trading like a pro.
Sign up for a free trading account in less than 10 minutes
Your 4-step guide to opening a trading account
Step 1: Getting registered
It’s very easy to open an account with Exness. Click here to open the sign-up page in a new tab. If you want to get everything done in the next 10 minutes, be sure to have your credit card, ID, and proof of address by your side. You can choose to open a demo account without these things. Either way, everything you need to know is here in this two-minute video. Pause the video as you go through the first three steps.
Tip: Account type depends on the amount you wish to deposit. Leverage can then be used to multiply your reach and allow you to make a large investment from a small deposit. If you are looking for high profit with high risk, a higher leverage might be right for you. If you prefer slow-burning safety with lower results, then keep your leverage low. You can never lose more than you have, but higher leverage means faster results… both good and bad.
Step 2: Prove who you are
Exness takes security very seriously, and wethey check every client signing up. Just like opening a bank account, you’ll need to prove who you are before getting access to the global markets. Watch this one-minute video to see how.
Tip: While you’re waiting for your real account to be approved, open up a demo account and start getting to know the trading platform.
Step 3: how to get access to the market
Trades are made using the award-winning MT5 trading platform or Trader app. Inside the box of the demo or real account you’ll see a gear cog. Click the gear cog to make a deposit. Use the passwords provided in the email. Click the gear cog again and select SIGN INTO MT4/MT5 WEBTERMINAL then follow this one-minute video. You’re about to make your first virtual trade on the real markets.
Step 4: making a trade
As a default, the top currency pair on the list will have an open chart. Right click on the chart and select the “close” option.
As a professional trader, selecting the right pair requires some research. For a first-time test, any pair will be sufficient. Drag a pair from the list of currencies on the left side of the trading terminal. The old saying goes, “what goes up, must come down.” Obviously, this principle goes the other way too. Your mission is to find a moment when the price direction is going to swing or reverse. If you feel the price is about to go up (bullish), then BUY, if it looks like it’s been trading high and the price has started a downward (bearish) trend, then SELL.
Open a trade
There are many ways to open your trade. You can select from the buy and sell options on the top left of the chart. Preferably, double-click the currency pair on the list. Right click on the chart when you’re ready to make your first trade. Time to set the volume depending on how confident you are in the direction you are forecasting. This is the perfect time to set your stop loss and take profit. Click the arrow to the right of the stop loss and take profit prices.
Note how the blue and dark red lines in the popup graph sit above and below the buy(ask) and sell(bid) price. In the example, we traded long (buy) and got a message confirming the order was successful. If you get an error, your volume was too high for your balance, or your stop loss/take profit was too close to the spread. Remember, every order starts as a negative because of the spread. Be patient. Your take profit will activate when the time is right, and your stop loss is protecting you. To close an order, you have three options. Click the X on the right or right-click the order. If you double click the order, you can close or modify the order.
You now know how to make a trade. Forex trading can be an exciting way to spend your free time, and you’ll learn some real-world skills that will serve you well throughout your lifetime. Be patient, learn, and who knows, you might one day be one of the lucky few full-time traders. How will you spend your day?
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This article is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience, or current financial situation.
This article is not prepared in accordance with legal requirements promoting independent investment research, and Exness is not subject to any prohibition on dealing before the release of the article. Readers should consider the possibility that they may incur losses. Therefore, Exness is not liable for any losses incurred due to the use of its articles. Please note that past performance of an asset is not a reliable indicator of future results.