Define leverage – Leveraging your trading and investments

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Best leverage forex trading

Forex or foreign exchange market was established in 1971, and is one of the largest financial markets involving a number of currencies. It is evident that most of the currencies which are traded in the forex market are the major currencies existing in the world market domain.

In this post, readers will get a deep insight related to best leverage forex trading as this is one of the most crucial matters which should be clear in the mind of each and every trader.

What is the best leverage in forex trading?

Before answering this question let us understand the term leverage.

Leverage in Forex trading can be explained as the borrowing money which is required by the traders to invest in a business transaction. Although mostly used by companies, it is also used by the traders. Trading of forex is considered to offer great leverage for such traders. Why so? It’s because, from a certain amount of money, traders can manage a forex account and ultimately make it big.

Best leverage forex trading depends on the capital owned by the traders, and it is said that 1:100 to 1:200 is the forex leverage best. It simply means that with $500 in the account of a trader, he/she can control $50,000. So, 100:1 is the best leverage to be used in forex trading.

Let us quote an example in order to understand how much leverage is required in different combinations of account size and trading style.

Day trader- $10,000 account

As it is evident that currency pairs like EUR/USD usually range from 100 to 150 pips every day, so the traders will not be risking 30 to 50 pips on any given trade. It is also worth mentioning that the losses on individual trade should be kept to 1% of the account size or less than that. Therefore, a 25 pip risk on a particular trade suggests that a trader can take 40 micro lots or 4 mini lots which is further equal to a risk of $100 in EUR/USD.

4 mini lots is equal to $40,000, so in this case leverage is a requisite. Risk is being substantially well-ordered in this scenario, and leverage is as always a great asset for this strategy. It is also possible that the trader may have taken multiple positions with the same risk value.

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Supposing a trader has 5 such positions. It conclusively suggests that a sum of $200,000 has already been deployed in the market. So, the trader, in this case, would need 20:1 leverage which may probably reach up to 50:1.

Hope the readers have understood the concept of ‘what is the best forex leverage.’

What are the pros of leveraging in forex trading?

Some of the advantages of leverage are as below:

The traders can grab maximum profits compared to other financial markets that too within a very short span of time.

It also lifts the buying power of the trader in the foreign exchange market.

With the help of high leverage amounts, the traders can make large profits.

So, I hope I was able to explain best leverage forex trading to all my readers. If you still have any doubts regarding this post, feel free to share with us in the comments section below.

Leverage in Forex is not an easy question it seems. Big funds tend to use minimum or no leverage at all, while most pro traders use 1:100 leverage which is not too high and not too low for profitable trading. Therefore, it is highly advisable to use precisely the 1:100 leverage. Don’t, however, forget about the rules of money management – using all of your deposit in a trade might lead to a great loss!

You should be very cautious when using Forex leverage because it is easier to suffer a loss when using a leverage too big for your deposit or using most of your deposit to open a trade.

Leverage is, in simple terms, using borrowed money from your broker to increase your profits when trading. It is a popular way of increasing your profit in the Forex market. To use leverage, a trader is required to have enough money on his account to meet the margin requirement. Margin requirement (or margin) is a per cent of the whole sum of borrowed money, calculated through leverage ratio. For example, a trader has to have at least 1/100=1% of the value of trade on his account to use 1:100 leverage.

More leverage often means more risk. If you have a limited amount of money and a big leverage involved in a trade, then your position is vulnerable to sudden price fluctuations. One such fluctuation might trigger stop out level and the trade will be closed automatically by your broker.

1:500 leverage means that for every dollar on your account you can buy 500 dollars worth of a lot in the Forex market. It works the same way with all the other leverage values. You’ll be able to buy 100 dollars worth of a lot with 1 dollar on your trading account if you use 1:100 leverage.

You can trade Forex without leverage, yet it is hardly profitable if you don’t have at least 000 or more on your account. Trading without leverage involves less risk exposure but it is not accessible for most traders.

Leverage is neither good nor bad. It just helps you to earn more. It can be risky to trade with a huge leverage and a small deposit as you will be susceptible to each and every price fluctuation which may easily trigger stop out level and close your trade automatically.

If you are a beginner in Forex trading, then try using small leverage at first (start with 1:20 or 1:33). After mastering your trading skills with a small leverage, you may gradually increase it. Remember that trading with a big leverage involves strict risk management rules.

Because they want you to earn in Forex trading! When there was no leverage, the Forex market was not a particularly accessible market with a threshold of many thousand dollars. Now, you can enter the currency market with just and earn using leverage.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. 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.

The Definition of Leverage and Margin

What is Leverage?

Leverage means using capital borrowed from a broker when opening a position. Sometimes traders may wish to apply leverage in order to gain more exposure with minimal equity, as part of their investment strategy. Leverage is applied in multiples of the capital invested by the trader, for example 2x, 5x, or higher, and the broker lends this sum of money to the trader at the fixed ratio. Leverage may be applied to both buy (long) and short (sell) positions. It is important to note that any losses will be multiplied as well as profits.

What is Margin?

A margin is the relative amount needed to carry out a leveraged deal, taking into account spreads, leveraging, and currency conversions. Let’s say you want to invest $1,000 in Apple stock at a leverage ratio of 1:10. The margin will be 10%, meaning you will need to invest $100. If the current stock price for Apple is $136, you will receive the equivalent 7.35 Apple shares.

How Does Leveraging Work?

  1. Choose the asset you are interested in trading on the eToro platform and click TRADE. A popup window with the trade parameters will appear, as illustrated below.
  2. Select the appropriate tab at the top for Sell (short) or Buy (long) for your trade.
  3. Set the amount of capital you wish to invest in this trade. Set your leverage multiplier. This ratio differs depending upon the individual asset. Alternatively, you can also trade without using leverage by choosing 1x.
  4. Set your Stop Loss and Take Profit parameters. A Stop Loss limitation is required in order to mitigate the possible risk to your capital.
  5. Click SET ORDER to place the trade. Trades are executed immediately when the market is open.
  6. Leveraged trades are processed as CFDs. To learn more about CFD trading, click here.

Which Instruments Can I Apply Leverage To?

Leverage may be applied when trading stocks, currencies, ETFs, commodities and indices, and, in certain circumstances, cryptocurrencies. Each instrument has maximum leverage limitations which are guided by industry regulations, as well as eToro’s own efforts to promote responsible trading and mitigate the risks of trading with high leverage. For more information on specific limitations, click here.

Maximum exposure will also vary by account type. An eToro Professional Client account allows for higher leverage. Only clients who meet certain criteria can opt up to become a Professional Clients. If you wish to read more about Professional Client status, please click here.

What Can I Do To Minimise Risk When Trading With Leverage?

While trading with leverage can lead to increased profits on successful trades, it also carries the risk of magnified losses. There are, however, risk-management tools at your disposal on eToro to help reduce potential loss.

  • Stop Loss: Apply a Stop Loss to close a trade in the event that the market moves a specified amount against your position. You can set your Stop Loss according to a specific level in the market (Rate) OR as a monetary amount, also shown as a percentage of your initial investment, in the trade window.
  • Take Profit: Set a Take Profit order to automatically close your position when profit on your trade hits the amount you choose.
  • Negative balance protection: On rare occasions in which market conditions cause your Equity to go negative, eToro will absorb the loss and reset your Equity to zero.

What Are The Fees For Trading With Leverage?

Overnight fees (also called rollover fees) are calculated using unified equations and will appear in the trade popup window before you set your order. To learn more about how these rates are calculated, click here.

Examples of leverage:

Invested Amount Leverage Trade Size
$50 1:20 $1,000
$200 1:30 $6,000
$400 1:10 $4,000

On eToro, each instrument has its own leverage minimum and maximum, so make sure to choose a leverage level which is right for you.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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You should seek advice from an independent and suitably licensed financial advisor and ensure that you have the risk appetite, relevant experience and knowledge before you decide to trade. Under no circumstances shall eToro have any liability to any person or entity for (a) any loss or damage in whole or part caused by, resulting from, or relating to any transactions related to CFDs or (b) any direct, indirect, special, consequential or incidental damages whatsoever. Cryptocurrencies markets are unregulated services which are not governed by any specific European regulatory framework (including MiFID). Therefore when using our Cryptocurrencies Trading Service you will not benefit from the protections available to clients receiving MiFID regulated investment services, such as access to the Cyprus Investor Compensation Fund (ICF)/the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service for dispute resolution. Trading with eToro by following and/or copying or replicating the trades of other traders involves a high level of risks, even when following and/or copying or replicating the top-performing traders. Such risks includes the risk that you may be following/copying the trading decisions of possibly inexperienced/unprofessional traders, or traders whose ultimate purpose or intention, or financial status may differ from yours. Past performance of an eToro Community Member is not a reliable indicator of his future performance. Content on eToro’s social trading platform is generated by members of its community and does not contain advice or recommendations by or on behalf of eToro – Your Social Investment Network.
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Margin & Leverage

What are they?

Margin can be thought as the deposit required to open and maintain positions. This is not a fee or a transaction cost but a portion of your account equity set aside and allocated as a margin deposit. Margin is normally expressed as a percentage of position size (e.g. 2% or 5%).

Leverage involves borrowing a certain amount of money needed to gain exposure to a particular market, with a relatively small deposit. Leverage allows you to take a position of much higher value than the monies deposited in your account. It is commonly expressed as a ratio.

How do they work?

How to check Leverage?

How to choose Leverage?

Available Leverage Min. Account Equity Max. Account Equity
500:1 $500 $5,000
400:1 $500 $10,000
300:1 $500 $50,000
200:1 $500 $100,000
100:1 $100 $100,000+
50:1 $100 $100,000+
25:1 $100 $100,000+
1:1 $100 $100,000+

How to change Leverage?

If you wish to change the leverage ratio on your Eightcap trading account, you can do it easily either by submitting a request through the Client Portal area or emailing us at [email protected].

Again, higher leverage ratios may not be suitable for every trading style. If you are looking to trade with higher leverage, please remember: leverage is a double-edged sword. Yes, it can assist in opening a larger trade size, but thus amplifies gains and losses.

Margin trading refers to using borrowed funds from a broker to purchase a financial asset or assets in a larger volume. Traders use margin to buy more stock than they would normally be able to (or afford to do). Margin is then used to create leverage to enter larger trades or open larger positions, in a bid to magnify gains.

Platform time is the real time trading platforms are set in, including the software’s charts and data.
EightCap clients have access to MetaTrader 4 (MT4) and MetaTrader 5 (MT5) and all clients trade under the same platform time. The platforms are set to Greenwich Mean Time (GMT) + 2 hours.

Charts are very important when it comes to efficient trading and interpreting market data correctly. Traders have the opportunity to use various charts and indicators that best suit their needs. Charts with a clear design and easy to read elements help the trader to take advantage of the rising trading opportunities on the Forex and CFD market. The most popular, found in MetaTrader 4 and in MetaTrader 5 is the candlestick chart. Candlesticks form various patterns that can help the trader confirm different market trends and make better trading decisions.

The Bottom Line

Using leverage allows for significant scope to maximise the returns on profitable Forex trades. After all, applying leverage means you can be controlling currencies worth 100 or more times the value of your actual investment.

However, if the underlying currency in one of your trades moves against you, the leverage in the Forex trade will magnify your losses and these losses may add up very quickly and without sufficient margin remaining in your account, you run the risk of those losses turning into realised losses.

If you are a new or inexperienced trader, we highly suggest that you consider limiting your leverage to a low level. Trading with higher leverage is one of the most common errors committed by new and inexperienced Forex traders.

Please also keep in mind that it is client’s own responsibility, not us, to continually monitor positions and make any margin payments as they become due.

Our trading platforms have a built-in automatic stop-out system to monitor and control risk exposure in real-time. If your account equity falls below the margin requirement, a ‘Margin Call’ warning will ensue, advising that you do not have sufficient equity to support current open positions – please note that this does not guarantee the balance will not go into negative; trade execution depends on market liquidity and pricing.

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Risk Warning: Margin trading involves a high level of risk, and may not be suitable for all investors. You should carefully consider your objectives, financial situation, needs and level of experience before entering into any margined transactions with Eightcap, and seek independent advice if necessary. Forex and CFDs are highly leveraged products which mean both gains and losses are magnified. You should only trade in these products if you fully understand the risks involved and can afford losses without adversely affecting your lifestyle (including the risk of losing substantially more than your initial investment). A Product Disclosure Statement (PDS) and a Financial Services Guide (FSG) for our products are available to download from our Legal Documentation page. You must assess and consider them carefully before making any decision about using our products or services.

‘Eightcap’ is a brand of Eightcap Pty Ltd (ABN 73 139 495 944) regulated by the Australian Securities and Investment Commission (AFSL 391441), Eightcap Global Ltd (Vanuatu) regulated by the Vanuatu Financial Services Commission company registration no. 40377.

The information on this website is of a general nature only and is not directed at residents in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Eightcap does not provide or issue financial advice, recommendations, or opinion in relation to acquiring, holding or disposing of a margined transaction. We provide general advice only and accordingly you should consider how appropriate the advice (if any) is to your objectives, financial situation and needs before acting on the advice.

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