Today I’ll explain what Forex leverage is and how you can use it.
It’s a tricky subject because using too little trading leverage will leave you with tiny profits, and using too much will blow your account.
So if you’re ready to learn about the best leverage for Forex, you’ll love this post.
Let’s get it!
Table of Contents
What is Leverage in Forex?
Leverage in the Forex market allows you to control a larger sum than you’ve deposited initially.
Let’s say you open a trading account with $1,000.
Here in the U.S., the maximum leverage is 50:1.
That means you can actually control $50,000 of tradable equity.
Of course, you can’t withdraw that extra $49,000 (wouldn’t that be easy?), but it is there for you to put on positions.
We know that a $100,000 position is equivalent to one standard lot.
That means $10,000 is one mini lot and $1,000 is a micro lot.
So if you were to open a $10,000 position (one mini lot) with your $1,000 account, you would be using 10:1 leverage.
For every $1 you put up, your broker is allowing you to borrow $10.
Simple enough, right?
I could get into all kinds of scenarios and equations here, but I like to keep things simple.
It also wouldn’t do you much good because as you’re about to see, leverage isn’t much of a factor as long as you manage one very important thing.
But more on that later.
For those who want to dig deeper, check out these examples.
The Benefits of Using Forex Leverage
Now that you understand what leverage is in Forex, the benefits should be obvious.
By leveraging your broker’s capital, you’re able to trade with larger positions sizes, resulting in bigger profits.
Of course, there’s a downside to leverage…
The Risks of Using Too Much Forex Leverage
If using leverage means larger profits, it also means larger losses.
That’s the risk of using leverage in the Forex market.
But I’ll take it a step further and say that’s the risk of using too much leverage.
There’s nothing wrong with using it if you keep your risk to 2% or maybe 3% of your account balance.
In that case, the leverage you use is negligible.
Where traders get themselves in trouble is by using all of the leverage available to them.
What’s the Best Leverage for Forex?
So what’s the best leverage to use?
It’s a personal decision, but I’d go with as little as possible.
Use enough to make sizeable profits, but not so much that you risk blowing your account on one or even a few trades.
Also, did you know that you can set the leverage available to you?
Yes, you can actually control how much your Forex broker allows you to borrow.
Most brokers start new clients with 100:1 leverage.
That’s usually the go-to figure (unless you’re in the U.S. where leverage is capped at 50:1).
However, if you aren’t comfortable with that, you can reduce it to your liking.
Most trading platforms will allow you to do this without having to get your broker’s support.
Of course, if you don’t see the option, you can always request that they lower it for you.
What’s the best setting, you ask?
There isn’t one. It depends on your circumstances and trading style.
That said, I would opt for the lowest amount possible or none at all.
The latter is particularly easy for those with larger accounts.
Chances are you will need to use some leverage.
Otherwise, the potential profits may not be worth your time.
You also don’t want to set it so low that you run the risk of a margin call.
If you’re unsure about this, be sure to speak with your broker.
And if you’re looking for a Forex broker with excellent customer service and New York close charts, check out Blueberry Markets.
But even if you have a smaller account, you don’t need 400:1 or even 100:1 leverage.
And if you do, it’s a sign that you’re probably risking too much per trade.
As a new or struggling trader, limiting your leverage to 20:1 or even 10:1 is a wise decision.
Unless you’re consistently profitable, using high levels of leverage will only help deplete your funds that much faster.
Remember, the name of the game is to survive.
You do that by protecting your capital, and limiting the leverage available to you is a good place to start.
Don’t Worry About Leverage in Forex (Do This Instead)
Now that you know what leverage is and that it’s a double-edged sword, I’m going to tell you to forget about it because it’s a non-issue.
Allow me to explain…
As long as you manage your risk per trade, the amount of leverage available to you is insignificant.
It simply doesn’t matter.
I could offer you a trading account with 10,000:1 leverage so that for every $1,000 you put up, I’m allowing you to control $10 million.
Sounds crazy, right?
But as long as you risk just 1% or 2% of your account balance, it makes no difference.
Two percent of $1,000 is $20 regardless of the leverage available.
The key word there is “available”.
As long as you don’t abuse it, leverage can’t hurt you.
Where traders get into trouble is when they start risking half of their account, or worse, on a single trade.
Using the example above, if your stop loss was 50 pips from your entry, you would use a 4 micro lot position, or $4,000.
That means you’re only using 4:1 leverage.
I’m still a fan of asking your broker to reduce the leverage available to you.
If nothing else, it will deter you from making the mistake of overleveraging your account.
But at the end of the day, the amount of capital you risk per trade is far more important.
As long as you keep it reasonable (between 1% and 3% in my opinion), the amount of leverage available to you is mostly irrelevant.
Final Words on Trading Forex With Leverage
Leverage is a double-edged sword.
On the one hand, it can help to boost profits, but it can also exacerbate losses.
In my opinion, the best leverage is none at all or the least amount possible.
This is particularly true if you’re losing money on a consistent basis.
Using excessive leverage when trading Forex when you’re losing will only deplete your trading account that much faster.
Many traders don’t realize that they can control the leverage available to them.
If you’re just starting out or still struggling, you may want to set it as low as possible.
It will help keep you in the game by preventing you from trading too large.
While the amount of leverage you use is important, it isn’t everything.
In fact, it’s somewhat trivial.
As long as you keep your risk to just one to three percent of your account balance, the leverage available to you is rather insignificant.
After all, one percent of $1,000 is the same regardless of whether your leverage is 50:1 or 400:1.
Frequently Asked Questions
What is leverage in Forex?
Forex leverage allows you to borrow money from your broker in order to control larger position sizes, thus allowing you to earn more from profitable trades.
What is a good leverage in Forex?
The best Forex leverage is the least amount possible. But instead of worrying about the amount of leverage you’re using, focus more on risking no more than 2% of your account balance per trade.
What leverage is good for $100 in Forex?
As little as possible. Focus instead of risking 1-2% of your account balance and building your trading account over time.
What is 1:500 leverage?
1:500 leverage refers to the ability to control $500 for every $1 in your account.
Did you learn something new about Forex leverage?
Are you going to focus more on managing risk instead of the leverage you use?
Let me know your thoughts below.