HOW TO TRADE USING LEVERAGE?
LEVERAGE INTRODUCTION – Let’s figure out what is the best leverage level for a beginner. Many newbies are attracted to the leverage-based earning strategy as they want to make more money in a short period of time.
However, remember that leverage is associated with certain risks. You need to at least understand the concepts that are directly related to money management in leveraged trading, such as:
- Balance and Equity of your account;
- Margin;
- Free margin;
- Account Level;
- Margin Call and Stop Out.
BENEFITS OF LEVERAGE USE
First, let’s take a look at the benefits of leverage for a novice trader:
1. CHANCE OF MAKING SUPER HIGH PROFITS
Using leverage on Forex gives traders the opportunity to increase their initial investment in order to play big.
BEST LEVERAGE RATIO EXAMPLE
For example, a trader who has only 1 thousand dollars on their account can actually trade on the Forex market with 50 thousand dollars with a leverage of 1:50 or 100 thousand dollars using a leverage of 1:100. Simply put, this trader risks losing 1,000 dollars of their own funds, but if successful, will receive a profit of $100,000 if the position was opened at 100% margin and the leverage 1:100.
2. IMPROVING CAPITAL EFFICIENCY
For example, if your account balance is $1000 and you use a leverage of 1:100, you will in fact have 100,000 USD to manage. This means you have the opportunity to open more trades in various trading instruments and apply hedging techniques for additional protection against risks .This allows you to diversify your portfolio, reduce risks, and increase the chances of making a profit.
3. Low entry level
Let’s look at this advantage using the previous example – you have 1,000 dollars on your account. Let’s say that you don’t use leverage, i.e. you trade 1:1.
Under these conditions, at best, you will be able to open one position with a minimum lot of 0.01, and not even on the EUR/USD pair.
This is because on Forex one lot is usually 100,000 currency units. In other words, to open a minimum position in one of the most traded pairs on the Forex market – EURUSD – you need 100,000 * 0.01 * 1.17470 = 1,174.70 USD.
With 1,000 dollars on your account and no leverage, you will not have the opportunity to open even such a small position. However, thanks to the large leverage, even people with a small deposit of 50-100 dollars have a chance to access the art of trading and trade on a par with professionals.
4. FAVORABLE FINANCIAL CONDITIONS
Before, when brokers provided no leverage, the only opportunity to trade with leverage was borrowing a very limited amount of funds from the Bank at high-interest rates, huge collaterals and guarantees.
In the face of serious competition, Forex brokers provide large leverage to attract clients with a very small amount of the deposit and with minimal commissions. If you trade intraday, using leverage will be almost free. If you decide to carry the trade overnight, take SWAP into account – it’s the broker’s overnight commission.
The deposit growth of the high risk traders can easily reach up to 300-500% profitability per month, which is much higher than in any bank.
5. CONVENIENCE
It is important to understand that the main income of a decent broker comes from the commissions for opening trades, SWAPs and spreads. Therefore, it is very important for a broker that each client uses their services as long as possible, achieves success in trading and becomes rich. A decent broker does not need you to drain your entire deposit and swear to never trade on Forex again.
Therefore, in a highly competitive environment, Forex brokers provide an opportunity to choose leverage on favorable terms at low interest rates, a flexible tariff schedule, and minimal commissions. Often reputable brokers even offer the personal manager services. A personal manager will help you understand all the nuances, choose the optimal leverage and balance your trading strategy.
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