The leverage in the forex trading provides the investor to control big with the small by the forex broker. Leverage is a short-term loan by the forex broker, which helps you to hold a large position with small capital.
For Example: to control the $10000 position, your broker aside $1000 from your forex account. Now your leverage becomes 100:1.
Now let’s say your investment rises from $100000 to 101000.
If you enter into trading with $100000 capital yourself, your return would be 1% ($1000 gain/100000 your initial investment). This is called 1:1 leverage.
This is the correct way to calculate the leverage. You may hear that the leverage is a double edge sword or leverage is a two-way street.
What is the leverage ratio in Forex trading?
The total amount of leverage is not constant by the brokers. The broker sets their ratio at 1:100 or more. In forex trading, the leverage is measured in proportion. For example, with the equity of $1, you can open the position up to $100.
What is the best leverage ratio for the beginner?
Now, figure out the best leverage ratio in the forex for the newbies. Many newbies are attracted to the leverage-based strategy. They want to get more profit in a short time.
The leverage has some risks. So you should understand the concept of money-related management in leverage trading. These are:
- Balance and equity of account.
- Free margin
- Margin called and spotted out
Leverage in forex trading
First, you need to know how to use leverage in forex trading. Take an example 100:1 leverage ratio. It means that you can trade a notional value 100 times greater than the capital in your trading account. Simply you need more money to trade, basically, leverage your currency trading.
Using the leverage size, you can use this formula to calculate the leverage and determine the amount of investment you need.
Buy trade: Ask price contract size/leverage ratio.
Sell trade: Bid price contract Size/Leverage ratio
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Professional Trader and Leverage
The professional trader trades with low leverage. They keep their leverage low and protect their capitals when they make trading mistakes, and keep their return back. Many professionals use the leverage size of about 10:1, 20:1. This type of leverage ratio is possible in forex trading. In short, if you use less leverage, it is better for you. It is experienced that when you use leverage and when not—staying cautious and living in the long-run game.
Leverage is the tool through which traders can get good results. They can get the advantage of earning more money with a limited investment. However, it is impossible to use the same leverage ratio for beginners and professionals in forex trading. This depends on the starting balance, trading strategy, and risk management. At the same time, the forex trading leverage ratio is 1:100. This ratio has favored beginner and professional traders.