Forex trading offers higher leverage than many other assets, which is why so many people prefer to trade forex. Using high leverage to trade forex increases your chance of making a lot of money from forex trading. Stock trading is also great, but offers lower leverage. You can only benefit from this money-making opportunity by registering with high-leverage forex brokers. In this post, we will deal with the term “leverage” and open your eyes to how it can change the way you trade forex in Canada and anywhere else.
Trading forex with leverage can be described as using someone else’s money to trade forex. Leverage enables forex traders to open higher positions in forex trading than the amount of money in their trading account can accept. The extra money they need to open such a huge trading position will come from the broker. So, someone using leverage to trade forex is using the broker’s money to trade.
Have you ever heard of using other people’s money to do business? The use of leverage in forex trading works in the same way. It enables you to use the broker’s money to do business or trade forex. The borrowed capital (leverage) depends on the forex broker where you register and the amount of leverage you decide to use. Virtually all the forex brokers offer a minimum leverage ratio. You should properly check this before you register with the broker.
Leverage has to do with borrowing money from the broker for trading. Registering with high leverage forex brokers Canada will make it possible for you to borrow a lot of money from the broker for trading. The borrowed capital will make it possible for you to control a lot of money and open a large position per trade. You can build up your balance and control a large amount of money for an initial margin. You can calculate margin-based leverage by dividing the total value of the transaction by the margin amount you need to put up.
Margin-based leverage does not necessarily have any effect on risk. It, therefore, has a minimal effect on profit or loss since the trader using high leverage forex brokers Canada can attribute more margin than required for any position they open. The stronger indicator of profit and loss is, therefore, not margin-based leverage but real leverage.
Leverage= total value of transaction/total trading capital.
If your account balance is $10,000 and your open position is $100,000, it means your open position is ten times higher than your account balance. It, therefore, means that you have 10x leverage. If your lot size is 2, they will be worth $200,000 of face value. This will increase your leverage to 20x.
Margin–based leverage equals to maximum real leverage you can use in forex trading on high leverage forex brokers Canada. The margin-based leverage almost always differs from the real leverage for most traders since they do not use their entire accounts as margin per trade.
Leverage is usually quoted in the form of a ratio. If your leverage is 1:10, it means you are borrowing 10 times the total amount you have in your trading account to open a trading position., if your leverage is 1:20, on the other hand, it means you are borrowing 20x of the amount you have in your trading account to execute that trade. The borrowed money is provided by the broker.
The amount you borrowed increases as the leverage you choose increases. Some brokers can offer as high as 500:1 leverage, allowing the traders to borrow a large sum of money to support their small accounts. Some brokers only offer 50:1 leverage, while it can be higher in some other brokers. Find out the leverage available when looking for high leverage forex brokers Canada.
While leverage offers a great trading opportunity to traders, you still must use it with care since it can be considered a two-edged sword. This means that leverage can either make you rich or poor. If the trade goes as planned, the leverage will yield a lot of profit for you. If the leverage is 50:1, it means you will get 50x the profit you are supposed to get if you use only the amount you have in your account to trade. If the trade goes against you, you will end up suffering a loss of the same amount. So, you should use leverage carefully. Even if you register with high leverage forex brokers in Canada, you should avoid using too much leverage lest you end up losing all your investments. You will surely not like the outcome.
So, how much leverage is safe to use? You should always go for comfortable leverage that will not destroy your trading account. The type of leverage you go for also depends on the type of trader you are. A conservative trader does not like to take too much risk and will, therefore, prefer a leverage of 10:1. Seasoned traders that have a higher desire for risk may prefer to go for 50:1 or even 100:1.
The leverage to use depends a great deal on the trader. A conservative trader should go for lower leverage, while a more advanced trader can opt for higher leverage. As a beginner, it is not safe to use high leverage. You should put that aside until you gain adequate trading experience.
Before deciding if or not to use leverage, check if the advantage is on your side. If not, avoid using leverage. You should never risk more than 3% of your portfolio per trade at any time.
According to many professionals, the best leverage to use for a $100 forex trading account is 100:1. It translates to your broker offering you an extra $100 on the amount available in your trading balance, enabling you to open positions up to $100,000.
Yes, you will pay back the leverage to the broker. You may even have to pay interest on the money you borrowed as leverage, depending on the broker.