Best Leverage Ratio For Forex Beginners
If you are a beginner in forex leverage trading and you are starting to experiment with leverage in your daily sessions you are probably been thinking about the best leverage for forex.
As I started my career in forex I constantly struggled with choosing the best forex leverage ratio because I didn’t know what ratio other traders were using and if I was using too much or too little for my style of trading.
In this guide, I will explain to you how to choose leverage ratio in forex if you are a beginner and I will also give you a good estimation of how much leverage you should use depending on your approach.
If you are a day trader in between scalping and swing trading, there is a sweet spot for you as well. We also have a guide for traders who want to know what the best leverage is for a small account of $100, $200, $500, or $1000. If you are a crypto trader I recommend reading our guide on the best leverage ratio for crypto.
- The best leverage for a forex beginner is between 1:20 – 1:200
- Leverage ratio is the amount of borrowed funds you receive from your broker
- The benefits of leverage are increased purchasing power and account flexibility
You will learn
What is the best leverage for forex?
The best leverage ratio for a beginner forex trader is between 1:25 and 1:200, sometimes higher but that depends completely on your skill level.
Since we are assuming that you are fairly new to the fx market I will base my answers accordingly.
It’s easy to throw out a number and hope that it will help as many traders as possible but that would be impossible considering that forex speculation is done by traders with different skill levels and also with different approaches.
To break down the answer to serve as many traders as possible we need to look at these two variables:
- Style of trading
Below is a table that will act as a guide to show the correlation between holding time and leverage. The X points out the optimal leverage for the chosen time frame.
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Most traders will fit somewhere in the range of 1:20 and 1:200 and here is why.
When using leverage you need to take into consideration how long you will be exposed to the market and from there make a decision on which ratio will be the right one for you.
As a general rule of thumb, traders with longer holding times are better off with a lower leverage ratio while traders with a shorter holding time will do better with a higher ratio.
A scalper that trades the AUD/USD fx pair and holds his positions from a few seconds up to a few minutes has less exposure to market volatility and therefore can take on more risk to outweigh the short time spent with an open position.
On the contrary, a swing trader that holds his position for a couple of days up to a week or two needs to be more risk-averse when it comes to the leverage chosen.
A higher ratio can easily cause your position to get liquidated through over-leverage due to your liquidation price being too close to your opening price.
Since the markets, in general, move more during two weeks than it does during two minutes, you are more exposed to volatility.
What is leverage ratio in forex?
Leverage ratios in forex are typically described as 1:100 or 100x where the number implies the multiplier of your account balance or your margin collateral.
The ratio tells you the relationship between your own capital and the total value of your forex position.
Let’s take for example a trader that deposits $800 in his brokerage account and wants to trade a position size of $120.000.
When this trader chooses a leverage ratio of 1:150 he will be able to trade a position worth $120.000 with his $800.
It is important to take this aspect into consideration when trading with leverage to understand exactly how much money you need to open a certain position and also to know how much you are risking in each trade.
What leverage is safe for beginners?
Now, if you truly want to stay on the safe side of the market and use leverage at minimal risk I have got some good information for you.
The most important thing to consider when choosing a safe leverage ratio in forex is the liquidation price.
The liquidation price is the distance from your open price to the level at which your position gets liquidated.
For example, a position without leverage has a 100% liquidation price which means that your position can pretty much fall endlessly and while you might lose a lot of that position, you can never get liquidated.
An fx position with a 1:2 leverage ratio has a 50% liquidation price which means that at a loss of 50% your will get liquidated.
A ratio of 1:3 has a 33% liquidation price, and so forth, you get the point.
So, the higher the ratio, the tighter the liquidation price gets and the riskier your position is.
A safe forex leverage ratio for beginners is 1:50 or less.
The reason for this is that at a ratio of 1:50 you will have a 2% distance to your liquidation price and it is highly unlikely that the forex market will drop more than 2% during a short time frame.
For those of you who are swing trading your currency pair, I would not recommend using more than 1:20, at this ratio you have a 5% wiggle room until you get liquidated.
Such a move is not very common over a couple of days in the fx market.
Things to consider when using high leverage in forex
Here is a list of things to consider for those of you who are going to use a high leverage ratio 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 to stay 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.
How do you calculate forex leverage?
The best way to calculate your forex leverage ratio is to use a forex leverage calculator.
This calculator will tell you how much leverage you can use depending on how big your account size is and it is especially important during highly leveraged trades.
For example, if you want to open a position worth $200.000 at a ratio of 1:400 you can input this data into the calculator to find out that you need to make a deposit of $576.
The calculation is based on this equation:
Total position value / Leverage ratio = Margin deposit
Here is the equation of the example I gave you.
$200.000 / 400 = $576
You can use the same calculation yourself if you don’t have access to the calculator but I always recommend using it as it is a much faster and more accurate way to calculate your leverage in forex.
Frequently asked questions
Leverage is a key factor in forex trading that allows traders to increase their buying power by borrowing capital from their broker during a trade. Without leverage, most traders would be stuck trading lot sizes that are smaller than $500 and would never make profits that actually matter. Leverage can also benefit traders who are already profitable but are underfunded.
A big risk for most traders is that leverage can incur much larger losses than would otherwise occur. When using a leverage ratio of 1:10, both your wins and losses will be multiplied 10 times. For example, if your standard loss is around $5 – $10, with 1:10 leverage, your new losses will be around $50 – $100.
Leverage is essentially borrowed money that you receive from your broker at different ratios such as 1:10, 1:100, or 1:400. The ratio is the multiplier of your current account balance. For example, if you choose a leverage ratio of 1:15 and your current account balance is $500, your maximum buying power would increase to $7500.
Final words – How to choose the best leverage ratio in forex?
The best leverage ratio for beginner forex traders is 1:20. However, if you are a short-term scalper you can justify going higher as long as you are using the correct risk management tools.
In this guide, I break down the most important questions you need to know when choosing your forex leverage ratio. These factors include:
- A table of the best forex leverage ratio based on the time frame
- Forex leverage ratios explained
- What a safe leverage ratio is
- Things to consider when using a high leverage ratio
- How to calculate ratios
After reading this guide you should have sufficient knowledge on how to choose your ratio, how to calculate ratios, helpful tips before starting, and some general guidelines around how to choose a safe ratio.