The content of the article
Leverage in Forex:
Leverage can bring great opportunities for Forex investors, as it is possible to leverage from 1 small amount of capital to enhance the position of the trading account. However, the greater the leverage, the higher the risk of losses.
The Forex market is the largest and most liquid market in the world. Therefore, when trading, traders can open/close orders extremely quickly. For that reason, Forex brokers are willing to give traders significant leverage (even Exness offers unlimited leverage, you can refer to Exness here).
Margin ? This part you only need to read to understand more, not important, do not need to understand too deeply)
A deposit given by an investor to a broker. This money is used to facilitate securities trading and is a key aspect of applying leverage to the direct market. Accordingly, margin requirements are set by the official broker and trading platform to protect market participants from excessive levels of risk and capital losses.
In forex trading, the leverage ratio is used to compare the margin used with the hidden value of a position. To do that, forex investors will rely on leverage. To put it more simply, if you want to have a high margin to trade large order volumes, you need to adjust large Forex leverage.
How to calculate leverage in Forex:
We can understand simply as for example we have 1 million. But that product costs 10 million. When we use 1:10 leverage, the amount from 1 million VND will become 10 million VND and we can buy 1 product.
If that product increases to 11 million VND, we will make a profit of 1 million VND, the profit is 10% (of that product was originally 10 million) but the hybrid is equivalent to 100% of the initial real capital of 1 million VND (X2 profit).
But that is the profit side, and if that product decreases by 5% (to 9 million 5) compared to the original product level (10 million), it means that we have lost 50% (to 500k) of the real account (real capital is 1 million). If it decreases by 10%, it means that the real capital decreases by 100% => The reason for burning the Account in Forex.
However, there are 2 sides, if we understand and take advantage of leverage, it will help a lot in our trading. Blackmantrader will record 1 number of pros and cons for you to better understand
Improve capital efficiency: In forex and CFD trading, capital efficiency is a comparison of the bet amount with the potential profit. High leverage helps investors maximize the potential of risk capital and turn minimal investments into huge returns.
Super profit: The greater the leverage applied, the higher the potential profit. With the opening of already large positions in the market, beneficial moves in valuation can generate extremely high profits.
Risk: Make no mistake—applying leverage increases an investor’s risk exponentially. As the position size increases, so does the PIP value. In case of sudden fluctuations, the amount of capital invested in highly leveraged positions will drop dramatically. If margin requirements are not met due to unrealized losses, you may be required to replenish margin and have your position liquidated early.
Tense: Trading high leverage forex/CFD positions can be stressful both physically and mentally. As leverage increases, the “deposit” placed on each trade increases sharply. Accordingly, investor sentiment often changes, large profits create excitement while large losses bring a sense of hopelessness. When in this state of euphoria or despair, investors tend to make decisions emotionally rather than strategically.
WHAT IS THE BEST LEVERAGE LEVEL FOR BEGINNERS?
In the Forex market, it really doesn’t matter whether the leverage is low or high. Because the main part is to set up high leverage to help you access large trading volumes (LOTs). If you know how to calculate the right trading volume for your account and manage your capital well, then you will know how many lots are reasonable for 1 order compared to your account.
But for beginners, setting low leverage is also very good because it helps to limit the accidental selection of the wrong order volume when unfamiliar with manipulation or unable to control emotions when trading. Therefore, Blackmantrader advises to set up accounts at 1:10, 1:20 for the first time. (You can see how to set up Exness leverage here).