Forex trading is hard, especially for beginners. You must invest time in reading the news devising strategic plans to improve performance, not to mention place trades. Most importantly, you have to stick to discipline in the face of challenges such as market volatility or major losses. To truly call yourself a Forex trader, you have to dedicate yourself fully to the pursuit. It may take one or two trades to make profits, or it may take six or seven trades to make profits. The point is that you need to wait and stay focused.
Forex traders often use leverage to take advantage of seemingly small price changes in currency pairs. Unique to FX trading, leverage means that, if you have a small amount of capital in your account, you can control a greater amount in the market. It’s basically the power of leveraging your account balance. Attention needs to be paid to the fact that leverage can turn out to be dangerous. If you make an erroneous trade, leverage will only amplify your losses. Forex leverage is a double-edged sword.
Leveraging is one of the most powerful tools Forex traders have in their toolbox
Leverage is practically borrowed money that is used to invest in the foreign exchange market to operate a larger volume and trade currency pairs through an initially small balance. Leveraged trading is commonly referred to as margin trading, trading on margin, or margin finance. Leverage levels take the shape of a ratio. You must have at least a particular percentage of the total available volume. Let’s take an example. Leverage 1:100 demands 1% of volume as collateral in the trading account. The initial margin required by each broker can vary, depending on the size of the transaction.
Using leverage to maximize gains seems like a good idea. As mentioned earlier, while you can reap quick rewards, there are some risks involved. At excessively high levels, leverage hurts your chances of success, regardless of the trade. Simply put, transaction costs put you at a disadvantage as they east up most of your margin. Some individuals have lost substantial amounts when exchanging currencies, losing their entire savings. The fact of the matter is that leverage is a powerful, yet dangerous tool.
There are only a few regulated Forex brokers remaining with high leverage ratios
By selecting a broker with high leverage you have access to multiple benefits such as increased position size, the opportunity to diversify your trading portfolio, and margin adjustments. In case you didn’t already know, there are very few Forex brokers with high leverage left. Make a list of the brokers you’re interested in, open a demo account, and give it a try. Since you’re at the very beginning in trading, it’s recommended to choose someone who has worked with newbies before. Your broker should offer educational material and ongoing support.
Let’s figure out what’s the best leverage level for a Forex newbie
Choosing the right leverage for FX trading depends on experience, risk tolerance, and comfort when operating in the global currency market. Rather than rushing to trade with leverage, you should take the time to understand some key concepts related to money management, as follows:
- Balance & equity of your account. The balance refers to the total amount of money that’s currently in your account. When you have active positions in the market, the equity on the account is the sum of the margin put up for trade.
- Margin. Margin is the amount of money you allocate to open a trade.
- Free margin. By free margin, it’s understood the money in the trading account that’s available for trading. To calculate the free margin, subtract the margin of your open positions from the equity.
- Account level. Standard Forex accounts require lots of base units.
- Stop out. A stop out is basically when your active positions in the Forex market are automatically closed by the broker. What happens is that the broker starts liquidating your positions.
If you still have questions or concerns, reach out to your Forex broker for further explanation. Also, you can do some reading online.
Given that you’re new to foreign currency exchange, the best thing you can do is to use a 1:10 leverage and 10,000 USD balance. The point is that the ratio for a beginner shouldn’t be higher than the ratio from 1 to 10. The more leverage you use, the more your risk. That’s the rule of thumb. If you’re serious about your success in the Forex market, you need to be cautious. You should definitely be careful about how much you trade.
On the flip side, if you’re really confident in your knowledge and expertise, you can select higher leverage. It’s paramount to work on your trading strategy and maintain discipline in foreign currency exchange. If you manage to do this, then high leverage won’t be a problem. Later on, you can move on to greater strategies.
It’s important to manage your account when trading
As a rule, it’s not a good idea to use the minimum allowable margin. The aim of margin requirements is to provide the trader flexibility when they need it the most. It’s not the level of trading you should be using during the normal course of things. It must be used within its logical limits. Successful traders tend to deposit more money than necessary. However, the decision is up to you.
Keep in mind that a highly leveraged trade can go against you and deplete your account in an instant. It’s essential to make time for tracking positions, know when to set stop losses, and prevent large-scale losses. For the time being, keep positions small and limit the amount of capital for each position. As a Forex newbie, you ought to remain conservative. It’s in your best interest. Don’t allow your impulses to guide you more than logic. If you invest a little bit of energy into crafting a trading plan, you’ll be more profitable. And hone your trading skills.
Marziano is a seasoned tech expert with over 15 years of experience in the industry. Holding a Bachelor’s degree in Computer Science and multiple certifications, including CompTIA A+, Network+, and Cisco’s CCNA, he has a well-rounded and robust understanding of various aspects of technology.