Best Leverage Ratio For Forex
As a beginner forex trader, it might be difficult to select the best leverage for forex and you probably wonder if 1:100 is better than 1:50 leverage or if you should go for a safer option.
What is a good leverage for forex?
There is no one-answer-fits-all here and it depends on your current strategy, or in other words, how you approach forex leverage trading.
Another important factor is how well you can manage risk and what type of risk tolerance you have as a person.
This and much more will be discussed in this in-depth guide on selecting the best leverage ratio for forex.
Key takeaway
- The best leverage for forex trading is between 1:20 – 1:200 where a beginner should opt for a lower ratio to manage the risk better.
- Experienced forex traders with a short-term strategy such as scalping can opt for higher leverage as long as proper risk management tools are used.
- The volatility of your market, your trading experience, and your current strategy are the three pillars that ultimately dictate what leverage ratios you should use in forex.
What is the best leverage ratio for forex?
In my experience, the best leverage ratio for forex trading is between 1:20 and 1:200 which will strike a balance between risk and reward depending on your experience and trading strategy.
As a beginner forex trader, it is important that you understand how leverage trading works to be able to control the extra buying power.
Here are three examples of different leverage ratios for forex to give you an idea of what to expect in terms of risk, profitability, and what trader is best suited for each ratio.
1:20 leverage
- Risk: Low
- Best for: Traders who are just starting and want to mitigate risk while learning. I recommend using a forex risk calculator to minimize losses.
1:100 leverage
- Risk: Medium
- Best for: Experienced traders with good knowledge of risk management strategies.
1:200 leverage
- Risk: High
- Best for: Advanced traders with a solid high leverage trading strategy and full knowledge of how lot size and leverage work together.
How to select leverage ratio for forex
When it comes to selecting leverage ratio for your trading strategy you need to take into consideration a couple of factors.
These include:
- Time in the market: Traders who keep trades open for a short term can often get away with using a higher leverage ratio. This is because the risk is lowered due to the short exposure time to the market forces.
- Volatility: A highly volatile market is more risky and requires a lower ratio. Traders who trade highly volatile forex pairs should be cautious when selecting their ratio to keep risk under control.
- Risk tolerance: Your personal risk tolerance matters a lot as well. The risk tolerance for each trader is different. For example, some people are very comfortable with risks in the forex market and can therefore use a higher leverage.
Take a look at the forex strategy you will use and decide whether it requires a high or low ratio.
Then, find out the average volatility of your forex market using a volatility indicator, I would recommend using ATR (Average True Range).
Lastly, examine yourself to see how much risk you are willing to take on while at the same time staying within the limit of how much risk your strategy allows.
Simply because you can handle a lot of risks doesn’t mean that you should over-leverage when trading forex.
As a rule of thumb, trading with leverage is not gambling and should be treated accordingly.
Which platforms let you choose forex leverage ratio
There are plenty of high leverage brokers for forex that allow you to change the default leverage ratio in your account.
Forex.com is a good example of a broker that lets you select your own leverage ratio.
To change the ratio on Forex.com you need to fill out a Margin Change Request.
Here you simply fill in the details and the new margin requirement that you wish to use.
This is a very ethical way where the traders themselves can choose how much buying power to use in the beginning.
Some brokers, such as IG markets do not allow you to lower or increase the leverage.
In our guide on how to change leverage on MT4 you can read more on how to change the leverage on this trading platform.
Other platforms that let you choose your own preferred leverage are:
- Avatrade
- Exness
- Pepperstone
These are all recognized brokers with a top reputation in the forex industry.
Read this Reddit thread where they recommend Pepperstone as a top broker.
Things to consider when selecting leverage ratio in forex
Here is a list of things to consider for those of you who are going to use a high or perhaps the maximum leverage in forex:
- Negative balance protection is key – The negative balance protection system is a risk management tool for leveraged markets that will prevent your margin balance from ever falling into negative. This means that you could get liquidated but you can never lose more than you have deposited into your forex broker.
- Never invest more money than you can afford to lose – This goes without saying but I highly recommend traders consider their initial investment as money that they can afford to lose. If you trade with “scared” money you will have a tough time staying rational during your open trades.
- Aim for short trades – Your high leverage forex trading strategy should focus on staying in the market for short durations. A maximum of a few minutes per trade is recommended due to how leverage affects losers in trading. The longer you hold your positions the more exposure to volatility you will have and you never want to let your day trades turn into a passive investment.
- Stick to one forex pair – Keeping several trades open at the same time is a very bad idea, especially when you are operating with high forex leverage. This is because at any time the market can swing positively in your favor or negatively against you and you need to be ready to close a position or perhaps add to a winner during a break-out. This is easiest done when trading only one FX pair at the same time.
- Always use a stop loss – I can’t stress enough how important the stop loss is for each trade when using a ratio that is higher than 1:200. At any given moment the market can fall 10 or 20 pips which could mean losses well into hundreds or even thousands of dollars. A stop loss will prevent most trades from surprising you on the downside.
Conclusion
When choosing the perfect leverage ratio for forex, there is no one-size-fits-all answer and it boils down to your personal experience trading the forex markets, your risk tolerance, and your trading strategy.
In this guide, I explain how time in the market plays an important role when selecting leverage ratio and how a short-term strategy, also called scalping, rewards higher leverage.
On the contrary, traders who stay longer in the market should lower the ratio to combat the increased risk.
I’ve found that a forex leverage ratio between 1:20 and 1:200 gives the most optimal balance between risk and reward.
However, it is important that you tailor the ratio to your own specific circumstances.
Avatrade, Exness, and Pepperstone are three brokers mentioned in the article that let you change the leverage ratio in your Forex account.
This is beneficial for each trader, especially for beginners who are new and trying to find out what works for them.
