Leverage is an important concept in forex trading, but it can be difficult for beginners to properly comprehend what it is and how it works.
In forex trading, leverage is effectively borrowing cash from the broker to allow you, the trader, to open a larger position relative to the balance in your account.
It can be a beneficial foreign exchange and trading tool at all levels, especially if you have a limited budget because opening a forex position usually requires at least $1,000.
Forex Brokers in South Africa
A $1,000 mark, for example, might be reached with as little as $10 and a leverage of 1:100. Because of leverage, you now have access to 100 times the funds in your account. However, the number and availability will be determined by your broker and the legislation in the country where you trade.
Three things to consider when trading with high leverage
When trading forex or any other type of trading with high leverage, there are a few things to keep in mind:
Margin calls can occur frequently.
Even a minor fluctuation in the price of your asset could result in a margin call, especially at lower money levels. This happens when you do not have enough money deposited to offset the loss produced by leveraged trading. Your positions may be automatically closed if the broker requests an extra deposit.
The more leverage you have here, the more sensitive you are to price movements. It is important to remember that with a 1:100 leverage, even a $0.10 change in the foreign exchange value is worth $10 based on your leverage.
The risk of trading with high leverage is increased by volatility.
As previously stated, when using large leverage, even minor changes in asset price can quickly compound. Market volatility has the ability to wipe out your account very rapidly in some situations, thus it is worth trying to invest in more stable assets and setting a frequent stop loss.
Risk management is critical.
Overall, it is apparent that trading with high leverage entails greater risk, which only increases as the leverage increases. A turbulent market that causes a margin call can wipe out even expert funds and traders. As a result, your risk management techniques, such as setting a stop loss and a take profit level, are critical. Using a demo account to learn more about trading before putting your money at risk is also a sensible decision.
What is the most powerful regulatory leverage available?
The leverage available to you in forex trading is determined not only by the broker, but also by the regulation you are dealing under, where you are, and the asset itself. Most licensed brokers with high leverage cap it at roughly 50:1, as is the case in Canada under the IIROC.
Some market authorities are more tighter, such as ESMA in Europe, the FCA in the United Kingdom, and ASIC in Australia, where maximum leverage is regulated to 30:1. This is considerably lower in Singapore under MAS, at 20:1. International regulatory authorities, such as the IFSC in Belize, the FSA in Seychelles, and the FSA in the British Virgin Islands, provide the most leverage.
The table below shows the maximum leverage permitted by many regulatory agencies around the world.
What is the optimal trading leverage?
Although there is no optimal level for every trader, 100:1 leverage is typically required to provide flexibility in various trading tactics. The desired leverage is determined by your personal circumstances, experience, and risk tolerance. Some traders may prefer to employ no leverage at all, but if you are experienced, it can be a terrific approach to fully exploit trading strategies while using minimal cash.
If you’re new to trading, one of the best places to start is with our guide to the top brokers for beginners.
Aside from that, you should take advantage of the demo accounts provided by high leverage forex brokers. If you live outside of the EU, it is worth visiting the FBS website (74-89% of retail CFD accounts lose money) to establish a free 30-day demo account, as it offers high leverage of up to 1:3000 under IFSC regulation, making it one of the highest leverage brokers in the industry. If you wish to trade with real money, FBS also has a minimal minimum deposit.