Leverage in forex – how to use it wisely
Michael Stark
Financial Content Leader at Exness
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
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Leverage in forex and other CFDs is a service offered by brokers. It basically lets you trade more, with the same amount of money in your trading account. The use of leverage is a key difference between trading CFDs, which are derivatives, and trading deliverable assets.
This article answers any questions you have about forex leverage and explains what it means for you as a trader. Keep reading to understand how leverage works and what you should know before trading with high leverage.
What is leverage in forex trading?
Leverage is a service you can use to open larger orders than would otherwise be possible with only the funds you deposit in your account. Leverage is not a loan but a ratio of your real funds to the amount you can trade with leverage.
The amount of leverage you can use to open a position depends on several factors, such as the instrument you’re trading, important forex market news, and your balance. Before diving into these, let’s examine the essentials of how leverage works.
The essentials of leverage
If you’re a trader using 1:100 leverage, it means for every dollar you deposit, you can trade as if you had $100 in your trading account. That affects the margin, the amount of capital needed to open a trade and keep it open.
When using leverage, your margin requirements are lower. Here’s how to calculate it:
contract size*lot size/leverage = margin required
Calculating margins with leverage
Let’s see how the calculation of forex leverage works if you want to buy 0.2 lots of dollar-yen (USDJPY) with 1:500 leverage:
Margin for 0.2 USDJPY, leverage 1:500: 100,000*0.2/500 = $40
If you’re using 1:500 leverage, you’d need $40 in margin for 0.2 lots of USDJPY. Without leverage, you’d need a margin of $20,000.
Remember that you don’t need to calculate margins yourself no matter the rate of leverage you’re using. Instead, you can use the trading calculator from Exness.
Relationship between leverage, margin and more
Leverage is one of the main factors that influence the numbers you see in the platform. We explain them here:
- Balance is the actual money you have in your account.
- Equity is your balance plus or minus any rolling profits or losses. If you don’t have any positions open, your equity and balance will be the same.
- Forex margin or used margin is the amount of money minus leveraged funds needed to keep a trade open.
- Total margin or total used margin is the combined margin for all your positions. It can also be called ‘margin’ if the context is clear or it’s unnecessary to be specific.
- Free margin is the amount of money you have available to make new orders.
- Margin level is the percentage of your equity compared to your total margin.
The toolbox in MT5 shows all of these figures together in one place.
In this example from MT5, the trader has a small position for gold with 1:100 leverage. Remember that Exness’ web platform, MT5, or whichever platform you use on any device helps you to learn about leverage and margin. These platforms automatically calculate equity, margin, free margin and margin level for you, so you don’t need to do it yourself.
Using leverage
Once you understand the basics of how leverage works, you realize it offers both great opportunities and great challenges in trading. You need a certain level of leverage to trade since you likely don’t want to deposit hundreds of thousands of dollars.
Using leverage in practice
Leverage has the potential to increase your gains but also your losses. This is because trading higher volumes effectively amplifies performance, whether good or bad. Inexperienced and reckless traders often lose more than experienced forex traders.
There’s no perfect leverage for every trader. It depends on your goals, experience, financial situation and other factors. That said, you can test different rates of leverage with different balances by practicing with a free demo account.
Leverage at Exness
Exness offers both fixed and changeable leverage depending on the instrument. Instruments which have fixed leverage include cryptocurrencies, while those with changeable leverage include forex and most others.
Your maximum available leverage decreases as your balance increases. For instance, if your balance exceeds $1,000 (or its equivalent in another currency) you can’t use Unlimited Leverage. However, you can withdraw money or open another account to use Unlimited Leverage.
Your forex leverage is also limited during major news. 15 minutes before up to 5 minutes after major releases such as the American job report (also known as ‘the NFP’), the maximum leverage for new positions is 1:200 for most instruments or 1:50 for indices.
There might be other rare situations where the highest leverage available is less than what you’d like to use. You can access more information through our Help Center through your Personal Area once you register an account with Exness.
Choosing which rate of leverage you want to use
To change the leverage for any of your accounts, start by logging in to your Exness Personal Area. On the main page of the Personal Area, ‘My accounts’, find the account for which you want to change leverage and click on the three dots to the right of the yellow button. Then click ‘Change max leverage’ and you’ll see this screen.
This is where you can change your maximum leverage in your Personal Area at Exness.
From the dropdown menu, choose your preferred leverage and it will change. However, remember that, as noted above, if you choose a high rate of leverage, this won’t always be effective, as explained in the information on this screen:
It’s extremely important to read these notes carefully when changing your leverage.
Does leverage increase risk and cause losses?
The simple answer is ‘no’. Bad and reckless trading causes losses and increases risk. There are many reasons for losses: unrealistic expectations and greed, poor placement of stops and targets, laziness in researching and monitoring trades.
Risk and leverage
Leverage doesn’t directly cause losses or increase risk: however, it can increase the size of your losses or gains.
Let’s say that you’re using 1:20 leverage and you sell 0.01 lot of euro-dollar (EURUSD). Unfortunately, your trade results in a loss of 20 pips, so you lose $2.
If you were using 1:2000 leverage instead and exploited this to trade a full lot instead of 0.01 lot, the result would be much bigger. You would lose $200 instead of $2. Leverage can make losses worse than they would’ve been without leverage, but it doesn’t cause them.
Potential benefits of using leverage
If you’re a good trader, leverage can potentially increase your gains. As mentioned above, some amount of leverage is necessary to meet margin requirements for larger trades and make trading worthwhile.
Imagine you make 100 orders every three months and, without leverage, each one is worth $2. If you profit 60% of the time, gross profit of $120 minus gross loss of $80, this brings your total quarterly profit to only $40. For the average person, this just isn’t worth it.
Profit and loss with leverage
On the other hand, if you used leverage of 1:100, your quarterly profit in that case would be $4,000. However, remember that if the ratio of profits to losses was reversed, 1:100 leverage would mean a quarterly loss of $4,000.
The bottom line is that skilled and successful traders should have no fear of using leverage responsibly. Leverage is in fact one of the main factors which make trading CFDs worthwhile for this type of trader.
Practical tips for trading with leverage
Although there are many differences between speculating with CFDs and investing in deliverable assets, leverage is one that stands out. You can control large amounts of money with a relatively small deposit, which makes it easier to lose a lot of money quickly, and you need to avoid that. Besides understanding forex leverage you must also know how to use it.
Learning to trade isn’t a race
Think about any other skill you’ve learned besides trading. When you first learnt to drive, did you start with a Maserati or a Tesla? If you’ve completed military service, was heavy artillery the first weapon you fired? Was cassoulet the first meal you cooked?
Almost certainly not. It’s the same with trading: don’t start with 1:2000 leverage. Test lower rates first and work your way up as your knowledge and skills improve.
Look before you leap
Almost every experienced trader was stopped out with their first deposit. Anyone who says otherwise is either extremely self-disciplined and good at managing risk, or not telling the truth.
Most people start forex trading with leveraged live accounts before they’re ready. If you’re unsure about your readiness, spend more time practicing on a demo account and researching key risk management tools. This doesn’t mean you need to use a demo account for years, just spend ample time practicing in a variety of situations close to what you’d do for real before you actually deposit real money.
Have tested rules and stick to them
As a retail or professional trader, you’re likely to have strict rules about drawdown and margin level. You stick to these rules because you’ve tested them and found that they help reduce both financial and emotional risk. This is a good strategy to adopt if you’re a beginner.
For example, you might set a rule not to open any new positions if your margin level drops below 200%. This gives you room for any losses to return to profit, assuming the original ideas for the trades were sound. This approach also reduces the pressure to close trades that are losing immediately.
Frequently asked questions
What is a good leverage for trading the forex market?
A good leverage to apply in forex markets or other CFDs depends on your risk management and discipline. There’s no definitive answer to this question.
Before regulatory changes in 2018, European brokers used 1:200 as the standard. Many traders still use this. It’s a round number which makes it easy for you to calculate margins in your head. It offers many options with a small deposit but is not so high that the risk of overtrading becomes very high.
Some traders prefer to use lower leverage, especially if they have large deposits. Others prefer very high leverage. It’s up to you, but consider your skill before choosing 1:2000 or Unlimited Leverage. If you’re not regularly succeeding in your trades, using high leverage could lead to bigger losses.
How do I calculate leverage when trading forex?
To calculate leverage in forex, take the second number in the leverage ratio, like 100 in 1:100. You either multiply that by your balance or use it to divide the unleveraged margin, depending on what you want to calculate.
For example, if you wanted to calculate how much you could trade with a deposit of $200 and leverage 1:2000, you’d multiply 200 by 2,000. That gives a result of $400,000.
If you wanted to calculate the forex margin required for half a lot (0.5 lot) of euro-dollar with 1:50 leverage, you’d divide 50,000 by 50. That gives a result of €1,000.
You can find details of how the calculation works under the section above, ‘Calculating margins with leverage’. However, you don’t need to do the calculations yourself: your preferred platform and Exness’ trading calculator can do it for you.
What is the best leverage in forex for beginners?
The best approach for most beginners to trading CFDs is to keep leverage as low as possible. You need some leverage to make CFDs meaningful, yes, but you need to build a consistent strategy and check the results first before you increase to higher leverage.
You can easily practice on a demo account with Exness using different rates of leverage. Test your approaches under conditions as close to real as possible and evaluate what goes well and what you need to change.
First practice for a few weeks before you start real trading with leverage. Start with the lowest leverage available at Exness, which is 1:2. If you’re consistently making a profit, you can think about increasing your leverage later.
Trading with leverage: consider your skills
Leverage or no leverage, trading is risky. Financial activities with potentially high rewards also come with high risks. If you trade with high leverage and don’t manage the risks, you’re likely to lose a lot of money. Even without leverage, if you didn’t manage risk, you’d still lose money, just less.
Are you a good trader? If you say ‘no’, it’s probably wise to keep your leverage as low as possible if you choose to trade for real. Even better, practice on a demo account first.
On the other hand, if you consistently make profits, you can consider increasing your leverage if it’s appropriate for you. Exness offers leverage from 1:2 all the way up to 1:Unlimited under certain conditions.
Open a Standard demo account with Exness and practice trading with different leverage. See how easy it is to change leverage in the Personal Area. Once you find what works for you and develop a good strategy, you’re ready for real trading.
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This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.