Best Leverage Ratio For Beginners With A Small Account
This guide is going to be a full tutorial on how to choose the best leverage for beginners with a small account in forex, cryptocurrency, and stocks. Learning how to calculate your leverage ratio is important in leverage trading because that’s what controls the size of your positions in the end. The calculation is rather simple but many beginners seem to find it difficult so I will break it down in an easy-to-read format.
Have you ever opened a trade and wondered, how much leverage should I use when trading, or what is the best leverage to use for a beginner? These are questions asked by most beginners that start out with small accounts and when you look at the stats, most novice traders use way too much leverage for their own best. This can result in catastrophe as a large position can be very difficult to handle and it only takes one bad position to throw away several hundreds of dollars.
Now, why would you need to control your leverage ratio?
In order to make steady profits as a leveraged trader, your position size is everything. If you are trading too big you are not going to be able to control the outcome, instead, it’s better to take one or two steps back and start out smaller. This will make your trading more comfortable and your chances of making stable profits as a day trader will increase substantially. Keep in mind that there is a difference in how to use leverage in long-term investing and day trading.
In this guide
What is leverage ratio?
Leverage ratio is the amount of borrowed funds that your position consists of and the other part of your position is going to be your own margin capital. Depending on how much leverage you want to use you will have a different ratio compared to your margin capital. For example, you might have a ratio of 1:2 which means that 50% of your open position consists of borrowed funds (leverage) and 50% margin capital.
There are two parts to a leveraged position:
- Leverage = The borrowed funds you receive from your broker
- Margin = Your own trading capital
The ratio between margin and leverage is chosen before you open your position and this is done in the trading terminal. The most common ways of writing leverage ratios are either x10 or 1:10 where the number 10 stands for how leveraged your position is. In this case, the position would be leveraged 10 times.
What is the best leverage level for beginners?
New traders who are not experienced with leveraged products are best off using a forex leverage ratio between 1:2 and 1:10 while day trading. Using more buying power than x10 your own money will only make things harder instead of increasing your profit margins. This is because at higher ratios your liquidation price will get much tighter and it can be very difficult to control the ups and downs of the market without increasing the risk, especially if you are leverage trading forex, stocks, or crypto. Since risk management in leverage trading is the foundation of each trader I don’t recommend overstepping these levels. Below are some helpful leverage guidelines to consider for beginners from 0 experience to a couple of years of experience.
- 0-1 years = 1:2 – 1:5
- 1-2 years = 1:6 – 1:15
- 2-3 years = 1:16 – 1:25
- 3-4 years = 1:26 – 1:35
Until you have gained sufficient knowledge and practice on how leverage works and how to execute a winning leverage trading strategy you are better off practicing at lower ratios to learn the game. Most novice investors are first thrilled with the possibility of opening bigger positions until they see the effect it can have on their losses since they don’t what happens if you lose with a leveraged trade.
Things can start out really well, even for a swing trader who is riding a trend, until the market pulls back and erases all gains and puts the trader in the read. The best way to control losses, in the beginning, is by trading smaller and stepping up little by little. If you are a beginner and want some extra tips, read our guide on leveraged trading tips, and for crypto traders read crypto leverage trading strategies.
When looking at forex vs crypto vs stocks I think the best leverage ratio is going to be found in cryptocurrency trading. Here you have the option of leveraging your account up to 500x if you like while there is no risk of losing more than you own to your broker.
For our crypto traders please see our guide “which is the best leverage for crypto” for more insight on how to choose a leverage ratio when trading cryptocurrencies with leverage.
Best leverage for $10, $20, $50, $100, $200, $500, $1000
Most novice traders start out with less than a couple of hundred dollars in their CFD leverage trading account, but what is the best leverage for $10, $20, $50, $100, $500, or $1000? In this section, I will explain how different ratios will affect a smaller account and how you can choose the most optimal buying power for your market. Take a look at the table below and consider your own risk tolerance when choosing your own ratio. The account sizes are written to the left.
|Low risk||Medium risk||High risk|
As seen in this table, the smaller account size has a higher leverage ratio which also means higher risk. This is because the loss of capital is smaller relative to the other account sizes and As we increase the deposit in our trading account our ratio should thin out to avoid applying too many risks to our positions. The reason why we don’t want to go over 1:50 is due to the added risk factor of account liquidation. When you use more than 1:50 the liquidation price shrinks to only 2% and this is a pretty standard move in any financial market. Should the stock you are trading fall by more than 2% overnight, your position will get liquidated and all your funds will be lost
Even with a $50 account and x35 leverage you can open positions worth $1750 which would result in a $350 gain on a position that made +20%. This is not at all impossible while trading crypto or some stocks that are highly volatile. Those who have between $500 and $1000 can access quite a lot of capital by using a ratio from 1:15 and 1:20. Adding a ratio of 1:20 to your $500 means that you can open positions worth $10,000 while still keeping your liquidation price out of reach.
Keep in mind that as you increase your buying power your fees are increased as well. Read our guide on leverage trading fees to learn more.
How to choose leverage ratio in Forex, Crypto, and Stocks
Choosing leverage ratios in different asset classes such as forex, crypto, and stock trading is different since the account structure of each product looks a little bit different as well as the behavior of each market can be totally different. Knowing how to choose the right position size and risk levels can make the difference between being blown out of the market and making steady gains. Trading stocks with leverage is usually done on lower ratios. However, day traders will benefit more from increasing the ratio when a good opportunity arises.
Did you know that a cryptocurrency can fluctuate more than 25% in one single day and that on some forex brokerage accounts you cannot regulate your own leverage? These are some common difficulties that new investors face early on in their career, so, in this section, I will shine some light on the big differences in each leveraged product and how you can make the best choices going forward.
The factor that ultimately decides your ratio is the volatility of the product you are trading. Since the forex market has one of the lowest levels of volatility the amount of leverage offered is among the highest with up to 1:5000. This is of course an incredible amount of risk but in normal cases, it is not uncommon to see traders use between 100x leverage and 500 leverage.
After reviewing plenty of forex brokers I’ve found out that some of them don’t let you choose your own leverage. Instead, you control your risk simply by choosing a different position size. This boggles me and I think you should be aware of this when choosing your market and broker. Always when opening a forex account you should see that the broker lets you choose your own ratio for each trade you open. If this is not a possibility I recommend that you keep looking.
Since the forex market on average has a monthly volatility of between 400-800 pips, the best leverage in forex is between 1:20 and 1:200.
Leverage trading in crypto has become very popular and we can see that many brokers are ramping up the ratios for retail traders. The main thing you should consider when opening a leveraged crypto account is whether you can choose between crossed and isolated margin. Always choose isolated margin. The isolated margin means that your margin capital is bound to one position only and should this position get out of control and get liquidated, your total account balance will stay intact. If you choose a crossed margin, one single position can access all your margin capital in your account and wipe out your whole portfolio.
The average monthly volatility in cryptocurrency is between 20-60%, the most optimal leverage is between 1:10 and 1:35.
Leveraged stock trading is not as popular as in forex and cryptocurrency simply because the number of brokers that offer high leverage trading is very few. Many governments have regulated this type of investing after realizing the high risks imposed on beginner traders. ETFs have become a very popular vehicle for stock investors and the rules for this type of product only allow for very low ratios to protect the end-users.
Since stocks have average monthly volatility of between 2% and 15%, the most optimal leverage is between 1:20 and 1:45.
Examples of how different leverage ratios affect profits and losses
Let’s take a look at how different ratios of leverage affect the outcome of trades in both directions. You have probably heard or experienced a big loss or a big win while trading forex or crypto but what are the real numbers? I will list down some of the most common position sizes together with some popular ratios to show you have your trade might turn out.
Take a look at the first table below where we go through the positive effects of leverage. In this case, our positions will only make positive results The position size is written to the left and we are going to assume that all our trades make a 15% gain each time but at different ratios.
This is a very clear example of how bigger positions increase the gains and as soon as you go over 1:10 leverage, a 15% profit will double your account. This example is not going to be your everyday trading but it illustrates what your top winners could look like.
In this example below, we are going to see how leverage affects a losing position. We are going to assume that we have a stop loss at -1,50% for each position size and see how the loss is affected by increasing the buying power.
The effect is pretty obvious and we can see that at a ratio of 1:50, a loss of only -1,50% would mean a loss of -75% of your total account. That is a high-risk strategy but if you keep your ratio below 1:10 it is much more manageable and you will stay in the game for longer.
How beginners benefit from leverage
- Small account – This is probably one of the biggest reasons and I see many new traders struggling with an account of less than $500. This can be a hard reality for many traders and without sufficient funding, it’s difficult to make a living out trading forex, digital assets, or stocks. When you enter the market with a larger position, the return on investment is far greater, and your profits ramp up quickly if you know how to trade. So, should a beginner with a small account use leverage? Yes, if you have a small account I think it’s wise to use low ratios and start off small by increasing your position sizes gradually.
- Diversify – This is an aspect that is overlooked by many retail investors and I think it’s worth shining some light on the fact that you are able to spread out to several markets as your position size increases. If you were able to trade one or possibly two markets before, you can now add another three to five markets to your strategy and spread out your risk among several asset classes at once. This is great risk management and also a great way to utilize your increased purchasing power.
- Increased profits – It goes without saying that amplified profits is the main reason why traders seek out leverage and this is probably the most beneficial part of the whole idea with margin-based accounts. I have seen beginner traders turning a $500 account into a $20,000+ account in less than a year with the use of more buying power. This is not an easy task but it is possible. However, if you strive for these kinds of results you have to put in the work and learn how the game really works, it is well worth the effort.
Why do brokers offer leverage to beginner traders in the first place?
The main reason is of course to make money but there are more benefits to the trader such as short-selling, more markets to trade, and it helps traders with a small account to trade larger size.
Most common risks of leverage
- Unexpected losses – The other side of the increased profits is the increased and unexpected losses that this style of investing calls for. Many new traders fall into the trap of using high leverage straight off the bat and get punished immediately by the market for being ruthless. On some occasions, novice investors might lose their whole stake simply by overleveraging their positions without knowing the risks attached to the situation. It is definitely possible to have a $200 account getting blown up in a few minutes if the market turns sour at the wrong moment. Be careful and start out small. Use this guide: High leverage trading strategy.
- Liquidation – Should your trade get out of control on high leverage there is a high chance that you will get liquidated. Liquidation happens when your margin capital is not enough to support your losses. When liquidated, all your funds are lost and you are left with an empty account and a badly hurt self-confidence. This is the worst scenario for any trader and if you have worked hard to save up for your initial investment, or collateral, you should think twice about how much leverage to choose the next time you get into the markets.
- Increased fees – This is a big one. Many traders don’t know that your fees increase while trading on leverage. Your fee is based on your position size and as you increase your bets, your commission increases as well. It’s not the same to open a position of $1000 at a 0.20% fee compared to opening a position of $10,000 at the same commission. The first position will only cost you $20 in commission while the second position has a fee of $200. Keep this in mind and aim to stay in the game for the long run. Read our guide on how leveraged trading affects fees to learn more.
- Inexperience – The biggest risk to beginners is inexperience. This boils down to everything from how brokers are set up to how you manage your positions while at the same time calculating your margin capital. It is not easy in the beginning and it can take time to learn the ins and outs. My best advice for new traders with a small account is to start out at low a low leverage and increase the stakes only after you succeed to lock in profits on a monthly basis. At the same time as learning the craft, I recommend that you study hard and read our guides to gain experience along with practicing in live markets. Should you be scared of entering the live markets directly you can always demo trade before, this will let you trade without risk while practicing your strategies.
What other traders ask
As mentioned in this guide, a ratio of 1:2 to 1:10 is an optimal way to start out as a beginner.
This depends on your overall risk tolerance. Some traders are keener on taking on more risk while others prefer to go slower. In this guide, I have recommended the best levels for low risk, medium risk, and high-risk traders.
With $100 you can use a ratio of 1:10 without affecting the risk levels that much. Since this is a very small account size you will be able to trade up to a maximum of $1000 lot sizes.
Yes, leverage directly affects lot size by increasing the amount of capital you can use for each trade. The more you use the bigger the lot size becomes.
At low levels, it can be a good strategy to use when you find an opportunity with a skewed risk-reward ratio combined with a good fundamental analysis. However, over-trading with borrowed money can be a disastrous idea in the long term.
This guide is a beginner tutorial on how to choose leverage for beginners with a small account. New traders are best off using a leverage ratio of between 1:2 and 1:10. This is because at higher levels the risk to the overall account will increase substantially and it will offset the potential reward. The risk lies in the liquidation price which can get dangerously close to your position and this can cause a complete loss of capital.
To get a more in-depth view on this topic I recommend that you read through this guide at least one time and take notes on the most important topics. This will set you up for a better start in your journey to becoming an experienced trader. Remember that trading is a marathon, not a race.