What-is-the-Best-Leverage-Ratio-for-Forex-trading What-is-the-Best-Leverage-Ratio-for-Forex-trading

What is the best leverage for a novice trader?

If you are new to Forex, the ideal start would be to use 1:10 leverage and a 10,000 USD balance. So, the best leverage for a beginner is definitely not higher than the ratio from 1 to 10.

If you are a novice forex trader, the ideal starting point is to use 1:10 leverage and a balance of $10,000. For novice traders, the optimal leverage should never be higher than a 1:10 ratio.

How to find the best forex leverage for you? Obviously, the answer to this question is different for every trader.

Let’s figure out what a good leverage ratio is.

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What leverage is the safest?

The table below shows the required collateral and balance changes for a 1 lot trade with different leverages for a deposit of $100,000.

Leverage Currency pair change (%) Trading volume (lots) Margin (USD) Balance change (%)
1:100 1% 1 1000 100%
1:50 1% 1 2000 50%
1:33 1% 1 3000 33%
1:20 1% 1 5000 20%
1:10 1% 1 10000 10%
1:5 1% 1 20000 5%
1:3 1% 1 33000 3%
1:1 1% 1 100000 1%

Suppose we are going to start trading with a deposit of $1000, the acceptable risk per trade is 1% of the balance, the acceptable volume reduction is 1%, and the portfolio is maximally diversified.

Leverage Open interest reduction (%) Maximum number of positions Balance (Dollar) Risk per position (%)
1:100 1% 100 1000 0.01%
1:50 1% 50 1000 0.02%
1:33 1% 33 1000 0.03%
1:20 1% 20 1000 0.05%
1:10 1% 10 1000 0.10%
1:5 1% 5 1000 0.20%
1:3 1% 3 1000 0.33%
1:1 1% 1 1000 1.00%

Now we will calculate the maximum number of positions we can open and the risk per trade, subject to the above rules.

From the above table we see that under such risk management requirements, the optimal leverage for Forex is 1:100 because with this leverage we will be able to open 100 positions at a time that meet our risk management rules, or a few positions with the lowest risk.

As you can see from this example, for trades with lower leverage, you need to increase your deposit in order to actively trade the desired diversification.

You might say that this is contradictory. How can trading with high leverage reduce risk? In fact, this is not contradictory. Liquidation risk does decrease as leverage increases while the trading volume remains the same.

All the disadvantages of high leverage mentioned above are related to the psychology of the trader and the violation of money management rules, which is why it is so important to work on your trading strategy and trading protocol. Only then high leverage will not be a problem and will not lead to loss of deposits.

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1:10 for novice traders

So, what advice is there for novice traders who are advised to use 1:10 leverage, but don’t have $10,000 and want to trade successfully and make money now?

  • Determine your trading style. Are you looking to day trade aggressively or catch a mid-term trend? Or do you want to build a portfolio and forget about it for a while? As can be seen from the above materials – the longer the trading period, the larger the required deposit amount.
  • It is very important to study the theory and the market you will be trading in. You absolutely need to master basic technical analysis.
  • Learn about the specifics of the market – news, reports, multipliers, indicators and other factors that may affect the price of your favorite instruments.
  • Trade only with funds that you are mentally prepared to lose. This may sound cliché, but it’s a wise saying! Following this rule will help you reduce unnecessary stress and trade with peace of mind.
  • Feel free to ask more experienced colleagues. Questions can be asked, but it is important to ask them correctly. Try to ask closed-ended questions with a yes or no answer. Answering such a question requires preparation and thought, and 80% of the time the other person will give you the correct answer.
  • If you decide that you don’t have enough time to actively trade, but you want to invest, the solution is social trading, where you copy other experienced traders (see here ). How to choose a true professional is a whole science, and I need to write a separate article about it. But do not copy a manager with the full deposit. Copy multiple traders to share risk.
  • Do not put all your margin into one trade. It is better to open 100 positions with 0.01 lot than 1 position with 1 lot.
  • Remember to use stop loss! Don’t let a position lose more than 2% of your deposit.
  • Don’t stop perfecting your risk management system. Determine the maximum allowable risk for the open position amount. Monitor risk management compliance for each position. Track account level. Avoid stop-loss exits.
  • Do not open a position without a predetermined trading plan. Determine entry points, take profit and stop loss levels, signals to add and exit positions.

Keep a trader’s diary! Write down trading parameters, entry and exit signals, and even the emotional state of entry and exit. Keeping a journal makes trading more cautious, provides a basis for self-reflection and learning from mistakes.

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How to choose the best forex broker that offers high leverage?

From the above example, we conclude that high leverage can be used. If you follow risk management rules and have proper trading protocols, high leverage is more advantageous.

However, do you need to find a broker with a leverage ratio of 1:1000 or more?

The answer is no.

In the foreign exchange market, there is simply no liquidity provider using leverage over 1:1000. Therefore, you should be immediately alert to any Forex broker using leverage like 1:2000. Most likely, this broker’s leverage is either created by other participants with overlapping trades in the opposite direction, or it’s virtual, meaning it’s a “speculation” and you’re being scammed.

Another sign of an unreliable broker is that you cannot trade directly with a liquidity provider using the raw market spread. “Speculative trading” usually does not provide such a service.

Also pay attention to customer service. Brokers who take care of their clients are available 24/7 to quickly answer any questions they may have. Such brokers also offer personal manager services to their large clients and offer a wide range of rates for each client.

If you analyze the brokerage market, you will definitely notice Litefinance. It has many advantages over other brokers:

  • Over 15 years of experience in the foreign exchange market;
  • A wide range of trading instruments (currencies, contracts for difference (CFDs), stocks, index funds, precious metals, hydrocarbons and cryptocurrencies);
  • Direct access to the market with the smallest spread;
  • Low overnight interest for foreign exchange accounts or no overnight interest for Islamic accounts;
  • Prevent negative balances;
  • Adjustable leverage (from 1:1 to 1:1000);
  • 24/7 customer support service;
  • Free educational programs and training materials are available;
  • Powerful analytics support;
  • Has a large community that serves as a platform for communication and exchanging experiences;
  • Social transactions are possible.

As you have noticed, LiteFinance can provide the best leverage ratio you need.

Go to LiteFinance’s Official Website

How does the high leverage ratio work?

Let’s look at a commonly used currency pair GBP/USD (GBP/USD).

Opening a position with a contract size of 100,000 per lot without leverage would require a trader to invest around $130,000.

When using the leverage of 1:1000, the amount of funds required can be greatly reduced. $130,000/1000 (leverage used) = $130.

Having a balance of $130 will be enough for you to trade the whole lot!

However, keep in mind that the LiteFinance stop loss level is 20%. If your balance is $130, the stop loss value is $26.

Therefore, in order to close the position with a “stop-loss”, the reduction must reach $104.

Considering that you entered the market in full lots, the price only needs to move 104 pips (in 5 digits) from the entry point in the “wrong” direction and your trade will be closed with a stop loss. As you know, this is a huge risk.

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Best Leverage Ratios for Forex with Examples

As we have seen, optimal leverage in Forex is a relative term. Furthermore, this tool must be used with caution. Using excessive leverage can either lead to incredible profits or bankrupt the trader.

The optimal leverage for Forex trading depends on the funds at the trader’s disposal. It is believed that a ratio of 1:100 to 1:200 is the best leverage for Forex trading. In this case, with proper risk management, traders can reap tangible benefits from margin trading. A leverage ratio of 1:100 means that with $500 in the account, the trader can trade with a total volume of $50,000, which is the best amount to start trading on the Forex market. At the same time, it is extremely important to follow your own risk management rules, do not abuse free margin, and always reserve a fund to prevent loss and liquidation of active trades in advance.

The optimal leverage ratio for Forex trading depends on the capital the trader has. There is a consensus that 1:100 to 1:200 is the optimal forex leverage ratio.

Leverage of 1:100 means that with $500 in the account, the trader has a $50,000 credit facility provided by the broker to trade. Therefore, 1:100 is the best leverage to use in Forex trading.

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Conclusion

Leverage is a progressive tool for traders to achieve good results. The obvious advantage of using leverage is that you can make a lot of money with only limited funds. However, it is impossible to choose the best forex leverage for both beginners and professional traders. This choice largely depends on the starting balance, trading strategy and chosen risk management model. At the same time, it is considered that the best forex leverage is 1:100. This is a compromise between sufficient buying power and the risk of stop-loss auto-closing. This leverage ratio is favored by novice traders as well as experienced traders. However, one should always keep in mind the risks that come with high leverage.

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