Forex Leverage Explained: Understanding Forex Leverage (and How to Use it for Success)

If you’re new to trading the forex markets, you may have heard the term forex leverage bandied about by brokers. Leverage on forex markets allows you to control larger positions in the market by only depositing a tiny percentage of the position’s value.

Essentially, forex leverages are lending agreements between you and your broker, borrowing more to magnify potential profits – but it’s not without its risks, as we’ll discuss in more detail below.

Why Leverage Matters?

In forex trading, leverage plays a key role, giving you the flexibility to open larger positions using smaller capital. If you’re a novice forex trader with only a modest trading bankroll, it gives you the opportunity to trade positions worth 10x or even 20x the amount of upfront capital committed to the trade.

Leverage in forex trading can amplify your potential profits, but it can also magnify your potential losses if your trade goes against you. This makes it risky for inexperienced traders.

Using the best forex leverage for beginners, such as 1:10 or 1:20 rather than 1:500, allows you to take smaller risks with manageable lot sizes, prolonging your capital.

At the other end of the spectrum, once you enter the realms of advanced forex trading, you may look to use as much leverage as possible to eke out bigger potential profits from short-term trades based around volatility or support and resistance areas.

Although many forex traders can and do trade without leverage, those with smaller accounts often use it to try and achieve the returns needed to make a go of their forex trading journeys. Whichever stance you take, proper risk management is essential to avoiding over leverage in forex.

How to Use Leverage

It’s important to see forex leverage used in practice to truly understand the concept. Let’s say you had a 100:1 leverage ratio. A deposit of £1,000 gives you the ability to manage an open position in the market worth £100,000. It’s a powerful trading tool, but determining the best forex leverage for your risk tolerance is vital to use it in a way that’s responsible to your trading bank.

The Advantages of Leverage

• Forex leverage makes it possible to trade larger amounts with less upfront capital. With forex leverage 1:100, even a modest 1% move on a currency pair could result in a 100% return on your upfront capital.
• Using leverage for your forex trades has a strategic benefit to your trading capital. With only a small percentage of capital needed to open larger positions, it frees the rest of your capital to go to work in other investments.
• Forex leverage is fully compatible with long and short positions in the market. This allows you to maximise the trading opportunities during both bull and bear markets.

The Disadvantages of Leverage

• The number-one downside to forex leverage is the potential for losses to be as large as the potential gains. If you mismanage a leveraged position, you could blow a much larger percentage of your trading capital. In this scenario, it’s possible you’ll receive a margin call from your broker for more capital to be deposited to maintain a losing trade.
• The pressure of handling highly leveraged forex trading positions can weigh heavily on inexperienced traders. This can result in irrational trading decisions being made, such as exiting trades prematurely or chasing losses.
• Using high leverage significantly reduces your margin for error. Without adequate risk management, even modest market volatility can trigger margin calls or, worse still, stop outs, closing your entire position for a bigger-than-expected loss.

How to Calculate Forex Leverage

It’s easier than you think to calculate forex leverage. Simply divide the total value of your trading position by the capital invested (known as your margin).

For instance, with a £100,000 position and a £1,000 margin requirement, you would divide £1,000 by £100,000 to equal a leverage calculation of 1:100.

There are forex leverage calculators and tools online which can help you to determine risk ratios, lot sizes and potential profits. Mastering how to calculate forex leverage will ensure improved risk management, while aligning your trading strategy with your short and long-term financial goals.

Best Forex Leverage Brokers

If you’re looking for a site which offers an impartial forex leverage comparison across the leading online brokers, look no further than STIC Cashback. We don’t just offer cashback through our partnered brokers. We also publish 100% independent and transparent broker reviews that make it easy to find the best forex leverage brokers. If you’re considering forex leverage for small account trading, you can pick the one which suits you best.

Here are a few of the brokers partnered with STIC Cashback that offer some of the best leverage on forex markets right now:

FxPro

If you’re looking for the best leverage on forex trading markets, look no further than FxPro. They offer 1:10,000 leverage for experienced and high-volume forex traders on forex markets, as well as gold markets.

FXGT

Our top-rated forex broker, FXGT, also offers up to 1:5000 leverage on the forex markets. However, 1:5000 leverage is only offered to traders with Optimus accounts, with 1:1000 leverage offered to those with Mini, Standard+, ECN Zero and Pro accounts.

SuperForex

SuperForex is another popular forex trading broker, allowing you to trade with zero commission on the forex markets. You can also trade with between 1:1000-1:3000 leverage, depending on the account you choose to open. 1:3000 leverage is available only with its Investor account.

Summary

Hopefully we’ve clearly explained the meaning of forex leverage and the difference between leverage and margin for you. When paired with adequate risk management, such as stop-loss orders, leverage can be a very effective ploy to maximise potential gains from short-term volatility in the forex markets. Just make sure to start with a modest amount of forex leverage to build your confidence and understanding of the concept.

FAQs

What is a good forex leverage?

If you’re wondering what is a good leverage ratio for forex trading, it ultimately depends on your risk tolerance. When you’re starting out, it’s best to use no more than 1:10-1:20 forex leverage. As you gain experience and confidence, you may decide to use 1:50 leverage or more, but only once you’ve fully mastered risk management, including stop-loss orders to minimise your downside.

What is the purpose of leverage in forex?

Understanding forex leverage is vital before you use it with your chosen broker. Leverage gives you the opportunity to open bigger positions by committing a fraction of the position value upfront. It’s particularly useful for increasing potential returns from minor market movements.

What is forex leverage and margin?

Forex leverage gives you the opportunity to open a larger position size with less upfront capital. Thereby magnifying your potential profits and losses. Forex margin is the capital you’ll need to deposit in your brokerage account to open and hold leveraged positions, safeguarding brokers against volatility and huge losses.