Leverage in Forex Trading

Leverage allows larger operations which could be performed only with our capital. In a single operation that should not risk more than 1-2% of the capital and to maintain this rule, we must take into account the leverage we use in our trading.

If we open an account with 1000 USD and we have a 100:1 leverage, we can use $100,000 (1 Lot) in one operation. Obviously this greatly increases the potential benefits but also potential losses. To maintain the rule of not risk more than 1-2% of the capital, we must put a stop loss at a level that should be reached to assume no more than 10-20 USD. With the volatility we see in the currency market, the stop loss is too small and will be reached very often if you use high leverage. Fortunately there are forex brokers that offer the possibility of trading with micro lots and this will allow us to keep the stop loss at this level as small $10 and have enough flexibility.

Of course, it may happen that we convert our 1000 USD in 2000 very quickly but in the long run, for sure, we can not keep this up and be out of the market by a margin call. It makes more sense to grow our account slower but more stable with adequate risk control. Thus, the gains will be more consistent and stable, and if we want to live the trading that can not be consistently at a high level of risk. For example, if we get an average of 5 pips profit, operating with a micro lot and performed five operations a day, we get approx. 2.5 dollars for beneficial (depending on the pair operated).

In absolute terms this may seem ridiculous but it is not! This gain of 2.5 USD in one day represents a profit of 0.25% on our trading capital in a single day, a really good number. As we continue to operate and be continuing our trading capital will increase and we can increase the amount of each transaction until we can make a profit even be able to afford to live trading.