Best Forex Leverage for Beginners

Federica D’Ambrosio

Senior Trader and CFO

Federica D’Ambrosio is a Senior Trader and CFO at Audacity Capital. She graduated in Finance from Luiss University enhancing her knowledge on global markets completing a Master of Science at Fordham university in New York.

Forex leverage is a tool that lets you trade or invest in the foreign exchange market using less of your own money than you would otherwise. That means that you can potentially earn more profits with the same amount of money that you have. But, it also means that your losses could be greater too. Unfortunately, for newcomers choosing the right leverage is always a daunting task. That is why the best forex leverage for beginners is widely discussed.

When most beginners start to trade, a common mistake they make is to think that the higher the leverage, the better. In fact, this is one of the most important things to know about forex trading: while it’s tempting to maximize your potential profits by using high leverage and borrowing money from your broker, in reality, it’s quite the opposite.

Leverage can be dangerous for a beginner because it allows you to make trades you don’t fully understand, and small losses can become overwhelming before you know it. To avoid this scenario, it is important to know what is the best leverage in forex and get used to trading with as little risk as possible.

What’s the Best Leverage for Beginners?

When you’re starting out, it’s tempting to go for the highest leverage possible. The temptation is understandable when we’re just starting out. All of us want to make more money as quickly as possible, and the idea of high-leverage trading with small amounts of capital seems like a great way to do that.

But high-leverage trading is definitely not the best way to grow your account quickly. In fact, it’s better to avoid high-leverage trading until you’ve mastered the basics and are ready to try some more advanced strategies. When you’re starting out, higher leverage can work against you in several ways:

First, if you make a mistake in your trade setup, it can be much more costly and you account might be wiped out. Another thing with high leverage is that it will make you overtrade and overextend yourself, which is not the best way to go if you are a beginner. Therefore, it is wise to start with a low leverage ration to grow your account successfully.

How Does Leverage Work in Trading?

Leverage is usually described as a double-edged sword by professional traders. This is because it can be an incredibly useful tool when you’re right, but it can also burn you to the ground faster. Before we take a look at the best leverage for forex beginners, it’s important to know how leverage works in trading so that when you’re using it, you understand the risks and know how to protect yourself from them.

To understand leverage, we first have to talk about margin and maintenance. Margin is the amount of money your broker requires you to put down as collateral for your account. This ensures that if the market moves against your position and your account dips below a certain value, your broker doesn’t force liquidate positions to pay for your losses. On the other hand, maintenance is the minimum balance that you need in your account at all times. If this dips below a certain point, it could also trigger a margin call.

Leverage comes into play when traders use a margin loan, which allows them to borrow money from their broker to buy more assets than they would be able to afford otherwise.

image of extra amount during leverage forex

A simple definition of leverage is basically borrowing money to invest. For example, if you were to open up a $100,000 forex account while using 1:2 leverage, you’d have $100,000 in your account, but your broker would lend you another $100,000 on top of that.

The idea behind this is that for every 1% movement in the market, you will profit or lose by 2%. In other words, if you make a riskier bet with 5:1 leverage and it goes up 5%, your profits will be 10%, and if it falls 5%, you lose 10%.

Advantages and Disadvantages of Using Leverage in Forex Trading

Advantages

  • It Boosts Forex Trading Profits: With leverage, beginner and professional traders alike can increase their returns by using reasonable leverages. For example, if you only have $1000 in your trading account, you can take advantage of 1:50 leverage forex to trade with $50,000. This is an opportunity for beginner traders to multiply their income to afford to trade using larger accounts.
  • Increases Capital Efficiency: When many people think of leverage, they imagine high profits. But did you know leverage can also boost capital efficiency? An average forex trader usually takes one to two months to make consistent profits using personal funds. Luckily, leverage allows the same traders to make huge profits in the shortest time possible. It also allows traders to diversify and minimize risks so long as they use the correct leverage.
  • Low Capital Required: Unlike prop firms that fund your account, forex brokerage accounts require a specific entry fee. The good news is that the entry fee will be low when you use leverage. The minimum amount required to open a position on the most traded currencies is 100,000. Since not everybody can afford to purchase 100,000 currency units, leverage comes in to aid those traders with very low investment capital. This means even if you have $50 or $100, you can still open a position in the forex market.
  • Convenience and Security: Leverage offered by brokers is convenient compared to borrowing money from the bank. Again, you can open a position at any time on the forex market, even if you have a low starting capital. Aside from that, using leverage services, which guarantee zero balance in times of liquidation, can help prevent further losses and avoid instances of margin calls.

Drawbacks

  • You Can Never Recover Your Deposit: Once you have lost all your money, it is unclaimable.
  • Losses Are Magnified: As much as leverage is good for improving returns, it can also magnify your losses if you choose wrongly. In fact, some leverage can wipe out your entire deposit. This is why it is good to research what is the best leverage for forex beginner traders.
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What are Forex Leverage Ratios? Which One Should I Choose?

If you are trying to find out which leverage is best in forex, it is crucial to know the various types that exist to make a sound decision. First, understand that leverage is mostly represented in ratios.

Leverage ratio is normally described as a financial term that refers to the amount of debt relative to equity in an investment portfolio. It’s expressed as a number and can be a useful tool for investors to determine how risky the investment might be. Many professional traders believe that the higher the leverage ratio is, the riskier an investment is likely to be. Here are some leverage amounts you may consider, depending on the amount you are investing;

  • 1:1
  • 1:10
  • 1:50
  • 1:100
  • 1:200
  • 1:400
Image showing possible magnification of losses in leverage forex for beginners

1:1 Forex Leverage Ratio

According to experts, low leverage can allow you to minimize risk and get reasonable returns depending on what you deposited. This makes the 1:1 ratio the best leverage to use in forex, especially for beginners who want to start with large capital. However, if you use this leverage, you are risking 1% for every trading position you open.

1:50 Forex Leverage Ratio

Many traders consider a 1 50 leverage ratio risky, but it is actually conservative compared to other leverage ratios. When you choose to trade with a 1:50 leverage ratio, you can open 50 different positions and risk 0.02% for every position you open. If you deposit $500 in your account and choose this leverage, it means that you can trade up to $25,000.

1: 100 Forex Leverage Ratio

With this ratio, you can control up to $100,000 with a deposit of $1000. This money can allow you to open a maximum of 100 trading positions.

1:400 Forex Leverage Ratio

1:400 leverage allows you to trade as much as $400 for every 1 dollar you deposit. You will find many trading accounts with a minimum lot offering this leverage, and with good risk management skills, you can gain huge profits. However, you should be very careful with brokerage accounts that offer this huge leverage on small accounts. 1:400 leverage comes with high risk, and your account can be automatically wiped out, especially if you deposit a small amount like $500.

 

 

Apart from the leverage ratios mentioned above, there are other ratios you can use. The table below should help you understand how different forex leverages work when you start with a deposit of $1000;

Table-explaining-how-forex-leverage-works

What’s the Best Leverage for $100

Many new traders usually prefer to start with $100 to see if their trading skills are well developed. Unfortunately, around 90% of forex traders lose money within the first few days of trading. This is because of poor risk management skills and sometimes the leverage in use. Many professional traders say that the best leverage for $100 is 1:100. This means that your broker will offer $100 for every $100, meaning you can trade up to $100,000.

However, this does not mean that with a 1:100 leverage ratio, you will not be exposed to risk. You must apply the best risk management skills to avoid blowing your account.

Audacity Capital is dedicated to helping you achieve the best trading skills to earn profits in the shortest time.

How Do I Choose the Best Leverage?

Leverage is mostly determined by the amount you deposit. If you are opening a large trading account, it is important to choose low leverage to minimize risk and maximize profits. Remember, currencies usually move by a small percentage, meaning that you may not profit that much if your deposit is small. Therefore, if you are a beginner, choose leverage you are comfortable with and will not expose you to many risks.

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Frequently Asked Questions About Best Forex Leverage for Beginners

  • Is it necessary to use leverage when trading?

    It is not necessarily that you use leverage. You can use your funds to open trading positions and still earn money. Alternatively, you can trade for prop firms like Audacity Capital and have your account funded.

  • Does leverage allow traders to earn more profit?

    Yes, leverage improves account efficiency, allowing you to make a good profit in the shortest time.

  • How can I avoid losing money while using leverage?

    The only way to avoid losing your deposit is to use risk management skills while using leverage.