When you are new to Forex Trading it is easy to assume that leverage has a massive effect on your trading performance. The truth is leverage has little to no impact on your trading account as long as you are controlling the amount you risk per potential trade on your trading account and limiting exposure.
What essentially makes high leverage dangerous is when a trader does not control these important factors and over risks due to the broker allowing them to risk more.
First of all, leverage only relates to how much a broker lends you in order to trade larger unit trades. As long as a trader follows a good low risk management process with there trading method, then leverage has no impact on your trading ( read below on truth about leverage ).
High leverage can be dangerous to a trader when a trader is over-risking their trading account, thus increasing the chance of having a margin call or blowing their account.
How Much Leverage in Forex is the Best?
First of all, the key question of all, so let me answer it first.. The best leverage amount is an amount that suits your trading method. A very common amount is x 100 which many brokers use and is a reasonable common standard amount in this industry.
Truth About Leverage
Leverage is not a problem in trading as long as trader understands it and as long as a trader controls their risk.
A good example of controlling risk:
- Trading with under 2% risk per trade setup
- Controlling exposure ( using a exposure limit such as 4% before management phase ).
Be aware that by trading with a lower level leverage amount does not improve probability, what it essentially does do however is reduce margin on a trading account. This essentially means that a trader may need a larger trading account in order to trade certain position sizes that a higher leverage account could do without being bigger in size.
Why High Leverage Makes a Trader Lose?
Not true, if leverage is high and a trader is risking a large percentage of the their trading account ( trading irresponsibly ), then yes it can make it more likely for a trader lose a larger amount of their trading account, this is due to a margin call being larger on a high leverage trading account than on a lower leverage account.
If however a trader is following a strict risk management process such as keeping risk under 2% per trade and keeping exposure limited then high leverage is not an impacting factor for a trader.