Good Leverage Ratio for Beginners
Leverage in Forex is the amount of trading funds that the broker is willing to lend to the trader's investment based on the ratio of the trader's capital to the amount of credited funds. The total amount of leverage provided by the broker is not constant. The broker sets the trader's rates, which in some cases can be as high as 1:100 or even more. Forex leverage is mostly expressed as a ratio.
Good Ratio for Beginners
Many
beginners are attracted to leverage-based earning strategies because traders
want to make more money in less time.
However,
keep in mind that leverage is associated with certain risks. Traders at least
need to understand concepts that are directly related to money management in
leveraged trading, such as:
Your account
balance and Equity;
margins;
·
Free
Margins;
·
Account
Level;
· Margin Calls and Stop Outs.
Benefits of Using Leverage
1. Very High
Profit-Generating Opportunity
Using
leverage on Forex gives traders the opportunity to increase the trader's
initial investment to play big.
The best
example of leverage ratio
For example,
a trader who has only 1 thousand dollars in his account can actually trade on
the Forex market with 50 thousand dollars with 1:50 leverage or 100 thousand
dollars using 1: 100 leverage. Simply put, this trader risks losing his own
1,000 dollars, but if successful, will make a profit of $100,000 if the
position is opened with 100% margin and 1:100 leverage.
2. Improve
Capital Efficiency
For example,
if the trader's account balance is $1000 and the trader uses 1:100 leverage,
the trader actually has 100,000 USD to manage. This means traders have the
opportunity to open more trades across a wide range of trading instruments and
apply hedging techniques for additional protection against risk. This allows
the trader to diversify the trader's portfolio, reduce risk and increase the
chances of making a profit.
3. Low
Initial Level
Let's look
at this advantage using the previous example - the trader has 1,000 dollars in
the trader's account. Let's say the trader is not using leverage, i.e. the
trader is trading 1:1. In this condition, at best, the trader will be able to
open one position with a minimum lot of 0.01, and not even on the EURUSD pair.
This is because on Forex one lot is usually 100,000 units of currency. In other
words, to open a minimum position in one of the most traded pairs on the Forex
market - EURUSD - a trader needs 100,000 * 0.01 * 1.17470 = 1.174.70 USD. With
1,000 dollars in the trader's account and no leverage, the trader will not have
the opportunity to open such a small position. However, thanks to the large
leverage, even people with small deposits of 50-100 dollars have the
opportunity to access the art of trading and trading on a par with
professionals.
4. Favorable
Financial Condition
Previously,
when brokers did not provide leverage, the only opportunity to trade with
leverage was to borrow very limited amounts of funds from banks with high
interest rates, large collateral and guarantees. In the face of serious
competition, Forex brokers provide great leverage to attract clients with very
small deposit amounts and with minimal commissions. If the trader is trading
intraday, using leverage is almost free. If you decide to trade overnight,
consider SWAP - that's the broker's overnight commission.
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