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.
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.