Whenever a trader starts explaining forex leverage for beginners, it tends to get a little too complicated. Leverage is one of the most controversial tools in the forex world. Some traders swear it’s a gift that can give small 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 leverage is a trader's best friend or just a 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? First, let's talk about what it isn’t. It is not a loan. In the past, brokers have described 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 leverage is by using a trading example. To keep things simple, we will skip the Ask/Bid calculation and not have a spread for the ‘Buy’ order.
In this example, the leverage is set at 1:1. In other words, no leverage. Let’s say a trader has $100 in his 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.
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 fell 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 such fluctuations. But if the price goes the wrong way, you can lose everything in minutes. There are other influences connected to a trading account such as Margin, Free Margin, and Equity, which can trigger certain actions such as Stop Out, but these generally lead to trading restrictions that protect the trader.
Is trading with leverage a good idea?
The benefits of forex leverage are very tempting. An Exness trader (based on location and an Appropriateness score during signup) can actually 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 would turn that $100 into $4000, if the trader had taken full advantage of the 1:2000 forex leverage. But the trade could also be wiped out in seconds by an ABCXY price fall as small as 0.0005.
When using high leverage on a well-funded trading account, a Stop Loss, Take Profit, and Trailing Stop are strongly recommended. 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 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. When your real account is approved and ready for trading, you’ll have a good idea how much to trade and at which forex leverage.
Keep your financial goals low for the first few weeks. Mastery won’t happen overnight. 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 a 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 is effectively an interest-free loan that the broker offers. It allows 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 they 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 MT4 trading platform. 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 IN TO MT4 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 actually 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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