One of the main loss reason in trading can be lack of knowledge about the trading situations and how much leverage is right for you in order to be in a safe side if in case any pit value falls.
Therefore, basic knowledge about leverage, trade terms and all the important information required to trade is necessary, in this article I will explain how much leverage is good to make you profitable rather than risk of losing the amount.
No doubt there is always risk associated in the forex market but one should must opt the ways in which the risk must be minimized
Leverage is the process of borrowing money for investing in forex market.
Thanks to financial institutions to limited the leverage ratio, but before 2010 the traders were allowed to take 4:1 ratio of leverage that was too much riskier but now there are limitations the ratio now is 50:1 but still that is a huge ratio that’s why many traders are in a big risk.
Example High Leverage
Example Trader has an account with $5,000 cash. With ratio 50:1 leverage, which means that he can trade up to $250,000. In forex trading, these are a composition of five standard lots.
Here are the three sizes in which a trader can trade in the forex market: a standard lot (100,000 units of quoted currency), a mini lot (10,000 units of the base currency), and a micro lot (1,000 units of quoted currency). Movements are measured in pips.
Trader Purchased 5 standard lots that make $25 as the formula is change multiply by lots so $5 x 5 lots). Now if the trade results go against the predictions of trader the trader will loss by 50 pips x $25=$1250 this is a total of 25% of total trading cash amount.
Example Low leverage
Example Trader has an account of $5000 but instead of maximum 50:1 leverage ratio the trader takes a low ratio to lower its risk, the ratio is 5:1 mini lot change is $1 since considering 5 min lots
The trade loss calculation for these traders are as follows:
$1 x 5 lots=$5
If the trader loss by 5 pips then the amount $5 x 5 lots=$25 means the trader will loss $25 only and that is 0.5% of the total trade amount
The above calculations show that the higher the leverage so higher the pip value that ultimately leads to high risk.