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Leverage from A to Z

1:11 PM Nov 1, 2019
3311
Forex trading

It may seem unrealistic, but your ability to correctly select the size of trading leverage can play a major role in your future Forex career. It is crucial to make this choice separately for each of your transactions. Once you figure out how to do it, you will decrease the number of unnecessary losses and increase your potential profits.

Today I will tell you what leverage is, why you need it and how to handle it properly.

What Is Leverage?

Billions of dollars go through Forex every day. Trading is conducted in lots. A standard lot is $100,000. Not every trader is able to invest such an amount, right?

Today, thanks to brokers, each person has access to the world currency market. They provide a kind of loan that increases your capital several times, allowing you to open a trade. This is basically the trading leverage. The size of the leverage indicates how many times your capital has been increased. With a deposit of $1,000 and leverage of 1:100, you can open a trade with a volume of 1 lot or $100,000.

Risks of Trading with Leverage

Most brokers today offer leverage from 1:1 to 1:1000. Some companies have raised their maximum leverage to 1:3000, but you should not consider this as an advantage. Yes, your profit will directly depend on your leverage: the higher it is, the more you will earn. However, if your trading predictions are wrong you may lose your entire investment in no time.

The cost of each pip depends on the volume of your transaction. Let's say your investment is $5,000. You choose 1:100 leverage and you open a trade with a size of $500,000, or 5 standard lots. With such a volume, 1 pip costs $50. If the market doesn’t move in your favor and drops by only 10 points, you will immediately lose $500.

Now let’s consider the same situation but with lower leverage size - 1:10. Imagine you open a $50,000 trade. In this example, 1 pip costs $5 and once the market moves 10 points against you, you will lose only $50.

In order to reduce potential risks you should always apply the following measures:

  • Choose the right leverage size.
  • Always set Stop Losses.
  • Risk only 1-5% of your full investment in each transaction.

How to Set Correct Trading Leverage?

It should depend on two main indicators:

  1. Position size
  2. Position duration

We have already discussed how the volume of a transaction affects potential profit/loss. Look at the size of your deposit and decide what percentage of funds you plan to invest in a particular trade. Then calculate what leverage is required to open this particular transaction.

It’s even easier with the trade’s duration - the longer your trade lasts, the lower leverage you need:

  • For short positions use the leverage from 1:50 to 1:1000
  • For long positions, especially the ones that are held longer than a day, use the leverage of 1:50 and lower

How to Switch the Leverage Size?

In FXCL you can change your leverage right in your Trader's Cabinet. You can also contact our Support Team and ask them to switch it.

Note that with the growth of your equity, the leverage will be changed automatically. The more funds you have on your account, the lower your leverage will be. This is done solely to secure your investments.

To Summarize

You might have an irresistible desire to earn maximum money in the shortest possible time. Fight this desire. Remember that small trading leverage has its advantages:

  1. You will reduce potential losses
  2. You can set a wider Stop Loss

I hope this article helps you to make your trading decisions more informed. At least regarding the choice of leverage.

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distribution long positions short positions double bottom triple bottom double top triple top pattern signal presidential cycle Elliott wave Kondratiev wave Forex terminology quote standard lot mini-lot micro-lot cross pairs exotic pairs counter-currency terminology Margin Call long position short position buy sell candlestick chart bar chart line chart range market channel high low ADX OHLC patterns profit level martingale aggressive EAs VPS demo account EA tester MeaTrader 4 trading signal chasing the market clicking the button COVID-19 oil trading lot EUR cent account Forex mentor novice trader emotions control fear psychological level round numbers Key Levels indicator MetaQuotes iOS Android mobile trading mobile terminal VPS server financial portals day trader position closing short timeframe fast trading news site news portal FXStreet Investing.com Forex Factory ForexLive DailyFX CPI PPI economic indicators Non-Farm Payrolls monetary policy FOMC retail sales inflation rates program installation intuition apps ECN brokers market makers financial markets indices commodities stock metals trading robots Forex mentors confidence bias low-frequency trading set and forget end-of-day trading exit trade auto-trading OCO trailing stop auto-management competitive advantage partnership IB referral Introducing Broker Sub-IB EURGBP EURCHF Donald Trump Twitter exotics minors trading patterns wedges pennants triangles breakout trading range trading confident trading trading goals japanese candles stars morning star evening star Japanese candles inverted hammer hanging man abandoned baby spinning top spinning bottom bars harami cross engulfing belt hold sandwich piercing line dark cloud cover marubozu three black crows upside gap two crows inverted head and shoulders trading figure trading pattern spike bearish spike bullish spike Mrs. Watanabe beginner trader carry trading young traders women traders figures diamond divergent triangle symmetrical triangle reversal signal morning routine unusual trading tips useful habits