Best Leverage for Forex Trading: What Ratio is Good for Newbies & Pros | Litefinance (2024)

Whether you are a newbie trader on the Forex market or have solid experience, you have certainly already encountered the concept of leverage. If you are just discovering Forex trading, you may be wondering what exactly this term means. In this case, I recommend you to read the article “What is leverage”.

Since leading brokers around the world offer different leverage ratios on Forex, here we will review the main points of trading with this financial tool and try to answer the question: What is a good leverage ratio? But first, let's define the key concept.

What is Leverage Ratio?

Leverage on Forex is the amount of trading funds that the broker is willing to lend to your investment based on the ratio of your capital to the amount of credit funds.

The total amount of leverage provided by the broker is not constant. Brokers set their rates, which in some cases can reach 1:100 or even more. Forex leverage is mostly expressed as a ratio. In this example, it means that with the equity of $1, you can open positions for up to $100.

What Leverage Ratio is Good for a Beginner

Let's figure out what is the best leverage level for a beginner. Many newbies are attracted to the leverage-based earning strategy as they want to make more money in a short period of time.

However, remember that leverage is associated with certain risks. You need to at least understand the concepts that are directly related to money management in leveraged trading, such as:

• Balance and Equity of your account;
• Margin;
• Free margin;
• Account Level;
• Margin Call and Stop Out.

If any of these concepts is unfamiliar to you, be sure to readthis article for a detailed description with clear examples.

Benefits of leverage use

First, let's take a look at the benefits of leverage for a novice trader:

1. Chance of making super high profits

Using leverage on Forex gives traders the opportunity to increase their initial investment in order to play big.

Best leverage ratio example

For example, a trader who has only 1 thousand dollars on their account can actually trade on the Forex market with 50 thousand dollars with a leverage of 1:50 or 100 thousand dollars using a leverage of 1:100. Simply put, this trader risks losing 1,000 dollars of their own funds, but if successful, will receive a profit of $100,000 if the position was opened at 100% margin and the leverage 1:100.

2. Improving capital efficiency

For example, if your account balance is $1000 and you use a leverage of 1:100, you will in fact have 100,000 USD to manage. This means you have the opportunity to open more trades in various trading instruments and apply hedging techniques for additional protection against risks (hedging and its strategies are discussed in detailhere). This allows you to diversify your portfolio, reduce risks, and increase the chances of making a profit.

3. Low entry level

Let's look at this advantage using the previous example - you have 1,000 dollars on your account. Let's say that you don’t use leverage, i.e. you trade 1:1.

Under these conditions, at best, you will be able to open one position with a minimum lot of 0.01, and not even on the EUR/USD pair.

This is because on Forex one lot is usually 100,000 currency units. In other words, to open a minimum position in one of the most traded pairs on the Forex market – EURUSD – you need 100,000 * 0.01 * 1.17470 = 1,174.70 USD.

With 1,000 dollars on your account and no leverage, you will not have the opportunity to open even such a small position. However, thanks to the large leverage, even people with a small deposit of 50-100 dollars have a chance to access the art of trading and trade on a par with professionals.

4. Favorable financial conditions

Before, when brokers provided no leverage, the only opportunity to trade with leverage was borrowing a very limited amount of funds from the Bank at high-interest rates, huge collaterals and guarantees.

In the face of serious competition, Forex brokers provide large leverage to attract clients with a very small amount of the deposit and with minimal commissions. If you trade intraday, using leverage will be almost free. If you decide to carry the trade overnight, take SWAP into account – it’s the broker’s overnight commission.

Thedeposit growthof thehigh-risk traders can easily reach up to 300-500% profitability per month, which is much higher than in any bank.

5. Convenience

It is important to understand that the main income of a decent broker comes from the commissions for opening trades, SWAPs and spreads. Therefore, it is very important for a broker that each client uses their services as long as possible, achieves success in trading and becomes rich. A decent broker does not need you to drain your entire deposit and swear to never trade on Forex again.

Therefore, in a highly competitive environment, Forex brokers provide an opportunity to choose leverage on favorable terms at low interest rates, a flexible tariff schedule, and minimal commissions. Often reputable brokers even offer the personal manager services. A personal manager will help you understand all the nuances, choose the optimal leverage and balance your trading strategy.

6. Security

You've probably heard about Margin Call. Many traders are scared breathless of these two words. But in fact, this function is designed to protect your deposit. Unfortunately, it often happens that novice traders misjudge their risks. When it becomes obvious to the broker that the chance of you losing your deposit is high, they call or send you an auto-message about the need to replenish your balance to cover high risks.

Sometimes negligent traders forget about leverage and the obligations associated with it. As a result of unreasonable trading, they can turn into the debtors of the company. To avoid this, use the services of brokers that guarantee zero balance in case of liquidation of trade. Thanks to this feature, you will never lose more than what you have on your balance.

Disadvantages of forex leverage

However, there is a dark side to leverage. Beginners should pay close attention to the disadvantages of forex leverage.

Let's break them down:

1. High risk of losing your deposit

This risk is a psychological trap that a trader falls into when using a high leverage. There is a feeling you have a lot of free money that you need to use and invest in something. It is very important for every beginner to remember that leverage not only gives additional opportunities but also creates obligations. The most important one is to cover losses at the expense of your own funds in order to prevent Stop Out (you can find a detailed description with examples here).

Since with the large leverage you can open positions hundreds of times larger than your real funds, there is a risk of incurring enormous losses to your balance. This situation is especially dangerous when several large positions are open at once. If you get losses in one trade, your account level decreases for all other open positions and the risk of Stop Out in these trades increases. In other words, if you abuse a free margin, your large structure of positions can collapse in a moment like a house of cards and burn up your deposit.

2. It’s very hard to recover the deposit

As mentioned above, it is very easy to incur a big loss on your balance with a large leverage. Newbies naively believe that since the leverage is large, it is quite easy to get the account back to its previous size. But you should always remember that to compensate for losses, profitability must be many times higher. For example, if with 100 USD on your balance, you get a loss of 50%, to return to a break-even position, you need to make 100% profit from the balance of 50 USD.

Below is a table for calculating the percentage of profit to return to the breakeven point in case of losses. I recommend printing it out and placing it in front of the working screen as a reminder to follow risk management rules.

In the case of large leverage, with losses on the balance your purchasing power falls as well, available funds for collateral decrease, and therefore the risk of Stop Out increases. This is usually compensated for by a decrease in the volume of positions, which in turn reduces the potential profitability, i.e. it will be even more difficult to recover in the end.

It is important to always remember that using low, medium or maximum leverage on Forex is a commitment. You return the main value of the leverage in the form of swap regardless of whether you succeed or fail at the end of the trading day. The leverage cost must be covered by the trader's account and will be automatically deducted from their balance.

Swap is a commission for using leverage that is automatically withdrawn from the trader’s balance. Obviously, the cost of leverage directly depends on the volume of its use. The broker usually charges the commission only for the actual amount of funds used.

What is the best leverage level for a beginner?

If you are new to Forex, the ideal start would be to use 1:100 leverage and 1,000 USD balance. So, the best leverage for a beginner is definitely not higher than the ratio from 1 to 100.

How do you find the best leverage in Forex for you? Obviously, the answer to this question will be different for each trader.

So let's try to figure out what a good leverage ratio is.

So what leverage is the safest?

The table below shows the calculation of the required collateral and deposit change for leverages with a classic lot of 100,000 USD.

Suppose that we are ready to start trading with a deposit of 1000 USD, with an acceptable risk per trade of 1% to the balance and an acceptable position drawdown of 1% with maximum portfolio diversification.

Now we will calculate the maximum size of positions that we can open and the risk per trade, subject to the above rules.

In the table above, we see that with such risk management requirements, the optimal leverage on Forex is 100:1, since in this case we will be able to open 100 positions at once that meet our risk management rule, or several positions with a minimum risk.

From this example, it is obvious that for trading with a lower leverage, you need to increase your deposit so that you can actively trade with the required level of diversification.

You may say that this is a contradiction. How does trading with a large leverage reduce risks? In fact, there is no contradiction. Liquidation risks do go down with higher leverage, provided that trading volumes remain the same.

All the disadvantages high leverageI told of above relate to the psychology of a trader and violation of money management rules, which is why it is so important to work on your trading strategy and discipline in trading. Then the high leverage will not be a problem and will not lead to losing the deposit.

So, what’s left for beginners who are advised to use a 1:100 leverage but don’t have $1,000 and want to trade successfully, making money now?

1. Decide on your trading style. Are you going to actively trade intraday or catch medium-term trends? Or maybe you would like to collect a portfolio and forget about it for a while? I hope that it is clear from the material described above - the longer the horizon of trades, the larger size of the deposit is needed.
2. It is very important to study theory and the market in which you are going to trade. You absolutely need to master basic technical analysis.Understand the specifics of the market - news, reports, multipliers, indicators and other factors that can influence the price of your favorite instrument.
3. Trade only with the money you are mentally ready to lose. It may sound old-fashioned but it's true! Following this rule, you will relieve yourself of unnecessary stress and trade with calm confidence.
4. Feel free to seek advice from more experienced colleagues. It's okay to ask questions, but it's important to do it right. Try to ask closed-ended questions with a yes-or-no answer. Such questions require preparation and effort, which will give you the right answer in 80% of cases.
5. If you realize you cannot spend enough time foractivetrading but you want to invest, the solution can be in social trading, where you copy other experienced traders (check this out here). Choosing a real professional is an entire science and I would need a separate article for this. But do not trust the entire deposit to one manager. Share risks between different traders.
6. Do not use the entire margin for one trade. Better to have 100 different positions with a minimum lot of 0.01 than one trade with a lot size of 1.
7. Remember to use stop loss! Do not allow the loss on one position to exceed 2% of the deposit.
8. Don't stop perfecting your risk management system. Determine the maximum allowable risk for the amount of open positions. Monitor compliance with the risks for each position. Keep track of the account level. Avoid stop out.
9. Do not open a position without a predetermined trading plan. Identify the entry-level, take profit and stop loss, the signal for increasing the position and the signal for exiting the market.
10. Keep a trader's journal! Write down trade parameters, entry and exit signals, even the emotional state when entering and exiting the market. Keeping a journal will make trading more mindful and provide a basis for introspection and learning from your own mistakes.

How to Choose Best Forex Broker with High Leverage?

From the examples above we concluded that high leverage is okay. If you follow the rules of risk management and have proper trading discipline, high leverage is more of an advantage.

However, do you need to find a broker with a leverage of 1:1,000 or more?

The answer is NO.

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There is simply no liquidity provider on the foreign exchange market that would cover leverage of more than 1000:1. So any Forex broker with leverage like 1:2,000 should immediately raise suspicion. Most likely, this broker’s leverage is either created by overlapping trades of other participants in the opposite direction or virtually, which means this is a bucket shop and you are being conned.

Another sign of an unreliable broker is that you cannot trade directly with a liquidity provider using a raw market spread. Bucket shops usually don’t provide such a service.

Pay attention to customer service as well. Brokers who take care of their clients have a service that works around the clock and answers any requests quickly. Such brokers also provide a personal manager service for large clients and a wide tariff range for each client.

If you analyze the broker market, you will surely notice Litefinance. It has many advantages over other brokers:

• more than 15 years of experience on the Forex market;

• a wide range of trading instruments (currencies, CFDs, stocks, indices, metals, hydrocarbons, and cryptocurrencies);

• direct access to the market with minimum spread;

• low swaps on classic Forex or no swaps on Islamic accounts;

• protection against negative balance;

• customizable leverage from 1:1 up to 1:1000;

• 24/7 customer support;

• own free educational programs and training materials;

• powerful analytical support;

• large community, a platform for communication and exchange of experience;

• access to social trading.

As you may have noticed, LiteFinance can offer the best leverage ratio you need.

How does high leverage ratio work?

Let's take a popular currency pair - GBP/USD.

Without leverage, opening a trade with a contract size of 100,000 per lot will require the trader to invest about $130,000.

Using 1:1000 leverage, one can drastically reduce the amount of capital required. $130,000 / 1000 (leverage used) = $130.

The balance of 130 USD would be enough to enter the trade in full!

However, remember that the Stop Out level with LiteFinance is 20%. With 130 dollars on your balance, it’s 26 dollars.

So for the trade to be closed by Stop Out, the drawdown will have to be 104 USD.

Considering that youentered with a full lot, the price has to go only 104 points (in 5-digit representation) from the point of entry in the "wrong" directionfor your trade to be closed by Stop Out. As you understand, this is a colossal risk.

Overall best leverage for Forex with Examples

As we have seen, the best leverage ratio on Forex is a relative term. In addition, this tool must be used with care. Using too high a leverage can either bring incredible profits or ruin the trader.

The best leverage for Forex trading depends on the capital at the trader's disposal. It is believed that a ratio of 1:100 to 1:200 is the best leverage for Forex. In this case, a trader can get tangible benefits from margin trading, provided correct risk management. A leverage of 1:100 means that with $500 in the account, a trader can open trades with a total volume of $50,000, which is the optimal amount to start trading on the foreign exchange market. At the same time, it is vitally important to follow your own risk management rules, not to abuse free margin and always keep a reserve of funds for potential closing of all open positions by stop loss in order to avoid early liquidation of active trades.

Best leverage in forex trading depends on the capital owned by the trader. It is agreed that 1:100 to 1:200 is the best forex leverage ratio.

Leverage of 1:100means that with $500 in the account, the trader has $50,000 of credit funds provided by the broker to open trades. So 1:100 leverage is the best leverage to be used in forex trading.

Conclusion

Leverage is a progressive tool for traders to achieve good results. The obvious advantage of using leverage is that you can make a lot of money with only a limited amount of capital. However, it is impossible to choose the best leverage to use in Forex for both beginners and professional participants. This choice largely depends on the starting balance, trading strategy and the chosen risk management model. At the same time, the best Forex leverage is considered to be 1:100. This is a compromise between sufficient purchasing power and the risks of automatic liquidation of positions by Stop Out. This leverage ratio is favored by both beginners and experienced traders. However, one should always remember about the risks that high leverage carries.

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• I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
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• Telegram chat for traders: https://t.me/litefinancebrokerchat. We are sharing the signals and trading experience
• Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.