How to Choose the Best Forex Leverage Ratio?
2023-06-19
Summary:
The higher the forex leverage ratio, the less capital traders need, but it also means greater risk. Different brokers have different leverage ratios, and traders need to choose their leverage ratios based on their risk tolerance and trading strategies.
How do I Choose the Leverage Ratio?
Forex margin trading (also known as forex leverage trading) is actually the activity of buying and selling contracts.
Understanding Forex Point Value and Leverage
Firstly, international forex quotations are in five digits. Taking the euro as an example, the euro/US dollar ratio of 1.2800 indicates that 1 euro can be exchanged for 1.2800 US dollars. If the euro rises from 1.2800 to 1.2801 or 1.2799 to 0.0001, this is called a point.
Secondly, internationally, the basic practice is to have a standard contract worth $100,000 and a fanatical contract worth $100,000. What is the value of that point? Just sit on it! 100000 US dollars * 0.0001 = 10 US dollars; 10000 US dollars * 0.0001 = 1 US dollar. So, whether using 1:100 leverage or 1:400 leverage, one point on a standard contract is $10, and one point on a fan contract is $1.
Thirdly, such a 100000/100x = 1000 US dollars or 100000/400x = 250 US dollars, which means making a standard contract. If it is 1:100 leverage, you need to use the money in your $1000 account. If it is 1:400 leverage, you need to use the money in your $250 account. How much other money is available in your account? How much risk can one bear?
Taking an account fund of $6000 as an example, purchasing 1 euro or US dollar at a decrease in price (1 dollar per point):
1: 100 times leverage: With a capital of $1000 and activity in the $5000 account, it can withstand a risk of 500 points. When the market price rises and a loss of 500 points occurs, a margin call will occur, and the system will force you to close your position. (General risks)
1: 400 times leverage: occupying $250 of funds with $5750 active in the account, it can withstand the risk of 575 points. When the market price fluctuates upwards and loses 575 points, a margin call will occur, and the system will force you to close the position. (Less leverage risk compared to 1:100)
In this sense, we can conclude that with the same amount of funds in the account and the same number of hands (1 contract is called 1 hand), the higher the leverage ratio, the lower the risk of a margin call! It should also be noted that if the leverage level is high and the margin occupied for each order is small, it is possible to control the excess situation, which will increase the risk.
In general, if the leverage ratio is not set appropriately, it will carry relatively large risks. Generally speaking, the larger the ratio, the greater the risk and the greater the profit. However, most current forex trading companies have not explained the leverage ratio to traders and automatically set a higher ratio for them. For traders who are just starting to deal with forex, I suggest not setting the leverage ratio too high. You can set it smaller, with fewer losses and profits. However, you can learn how to invest in forex. Generally, traders who are new to forex investments cannot avoid losing money. Therefore, when starting to invest in forex, do not blindly pursue high profits. Learn from experience first; experience is very important.
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