RISH WHEN USING HIGH LEVERAGE 

Leverage is the process in which an investor borrows money to invest or buy something. In the trading market, the capital is taken from the exchange. Traders can borrow a certain amount of this capital for initial margin, and Traders can earn more if trading smoothly.

In the past, many exchanges allowed leverage ratios as high as 400: 1. This means that, with just a $ 250 investment, a Trader can manage $ 100,000 in the global trading market. However, the financial law is regulated in 2010, whereby traders in the US use maximum leverage of 50: 1 (still a high number), meaning that with the same $ 250 investment, Traders can $ 12,500 management.


So should a newbie choose a low leverage level of 5: 1 or fully raise it to 50: 1 (for US clients)? Before answering this question, it's important to go through some examples of how money goes up and down with different leverage levels.

MAXIMUM LEVERAGE USAGE EXAMPLE

Imagine trader A has a $ 10,000 account. He decided to use 50: 1 leverage, which means he can trade up to $ 500,000. In the trading world, this is equal to 5 standard lots. There are three basic ways to calculate volume in the market: one standard lot (100,000 currency units), one mini lot (10,000 currency units), and one micro lot (1,000 currency units). The price movement is measured in pips. One pip of movement in one standard lot corresponds to 10 currency units.

Because the trader has placed 5 standard lots, each moving pip corresponds to $ 50. If the trade goes back 50 pips, he will lose 50 pips x $ 50 = $ 2,500, 25% of his $ 10,000 account.

LOWER LEVERAGE USAGE EXAMPLE

Consider trader B. Instead of using a maximum 50: 1 leverage, she chooses a leverage level lower than 5: 1. If trader B has a $ 10,000 account, she can trade up to $ 50,000. Each mini-lot is $ 10,000. In one mini-lot, each pip is worth $ 1. Since trader B trades 5 mini lots, each pip moves equivalent to $ 5.

If the investment also goes in the opposite direction, i.e. 50 pips, then this trader will lose 50 pips x $ 5 = $ 250, occupy only 2.5% of the account.


HOW DO I CHOOSE THE RIGHT LEVERAGE?

There are different ways when traders consider choosing leverage. The three easiest things about leverage can be done right away:
  • Maintain low leverage.
  • Use a trailing stop to minimize risks and preserve capital.
  • Stop-loss limits range from 1% to 2% of the total account per command.
Traders should choose the leverage they feel most comfortable with. If you are conservative and risk-averse, or you are still learning to trade, a low leverage level of 5: 1 or 10: 1 is most suitable.

Using the trailing stops helps investors feel more secure and minimize losing orders when the market goes in the opposite direction. These orders are very important because they reduce psychology when trading and give each individual the incentive to exit the trading desk.

SUMMARY

Choosing the right level of leverage depends on the trader's experience, risk tolerance, and comfort zone when entering the currency market. Beginning traders need to become familiar with the rules and survive in the market to learn to trade and build experience. Using trailing stops, small orders and low risk is a good start to learning how to manage leverage.