One of the reasons why many traders are attached to forex compared to any other financial instrument is that forex trading attracts more leverage than stocks would do. However, like many traders, you may have heard of the word leverage, but you do not know its meaning. But all is not lost as you have landed on the right page. I will explain the importance of the term leveraging and describe how it works in forex trading. If you are patient enough to scroll down the article, you will understand how much you need to start leveraging in forex trading.
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Understanding the Term Leveraging
The term leverage refers to a process in which investors borrow money to invest or buy something precious. In other words, it is the use of borrowed money to maintain a particular trading position. In forex trading, the capital required to achieve this is typically acquired from brokers with an experience of how absolute markets operate. Most forex traders are placed in a good position of borrowing significant amounts of capital that can be used to start trading. In the recent past, brokers could leverage important ratios of up to 400:1. The aspect means that, with a deposit of $200, a trader can control and leverage up to $800,000 in the currency on the global forex markets. However, with time, various institutions have been managing the rate at which leveraging is done, as many brokers use a ratio of about 50:1. This is a significant ratio as with $200 a trader can still control up to $10000.
How to Pick the Right Leverage
If you are new to forex trading, the following are some rules you should uphold to the latter.
- Maintain low levels of leverage and avoid being over-ambitious.
- It would be best to learn how trailing stops work and use them wisely to reduce the downslide flow of your leverage and protect your capital.
- You need to limit your capital to 1% or 2% of the total trading capital of every position you take in the market.
Why the rules?
By following these rules to the latter, you will avoid a downside trend of your initial capital which in the long run may cause you to suffer a considerable loss. As a wise trader, use a level that makes them more comfortable. If you are conservative and fears taking many risks, you can start leveraging with a small ratio of up to 5:1 or even 15:1. However, as you learn and gain more experience, you can keep increasing your leveraging level. However, it would help if you were careful, as the more you increase the leverage level, the more risk you are exposing your capital. In other words, if you fail to capture the marketing trend with ease, you may stick to a small ratio and end up suffering a huge loss.
Bottom Line Selecting the right forex leverage level depends on a trader`s experience, ability to tolerate risk, and comfort. Therefore, if you are a new trader, focus on gaining experience before using a leverage level that might cost you dearly.