How to Calculate Leverage in Forex

1. What is the best leverage in Forex?

The best leverage for trading is the minimum that allows you to achieve your goals. If it is not necessary for you to leverage yourself, do not, as that will reduce your risk. Do you really think that most losing traders are losing because they don’t have a higher level of leverage?

It is possible that you think that since you have a small account, the trick is to leverage yourself as much as possible, but in these years I have seen how many traders open small accounts that later go bankrupt, then open another one… and thus entering a vicious circle.

A leverage of 1:30 is more than acceptable. From here, if you have more you can use it or not. The fact of having a leverage of 1:500 does not mean that you are going to be overexposed in the market or with an excessive level of risk, simply the broker will require less margin and that’s it. The key is that you always have the maximum loss of each trade in money under control and that it be manageable.

2. Margil call

At this point you will think that leverage is a bargain. You can make use of it in small accounts and if the operation goes well, you will earn a lot of money and if it goes wrong, you will lose what you have in the account. You know, lose little, win a lot… right? No, because you must be very clear that the broker will normally close your operations when you run out of margin in the account (margin call), since he is not interested in you ending up owing money to him. But be careful because if this is not the case, they can ask you for the amount you have lost if your account is in negative, since they do not have the obligation to do so. In other words, you are ultimately responsible. The margin call is the ‘game over’ of trading.

Let’s go with an example, we have a balance in our account of 1,000 dollars and a leverage of 1:30. We open a buy trade for 0.30 lots in EUR/USD ($30,000 face value). Our required margin to make the trade is $900. We only have 100 dollars in our account and if the EUR/USD falls, the margin will decrease.

In other words, of the $30,000 of exposure that we have in the market, with just a little more than 0.3% we would be left with no margin to face the losses and the broker (it is not obliged) would close the operation for us. This is what we have called margin call before. In this case we would assume the loss, but if you take this to the extreme and the positions are not closed or an event occurs, it causes the prices to move a lot in a short space of time (news, black swan, events such as Brexit…) the consequences can be worse.

3. Is leverage bad?

Let’s think a little with perspective, is salt really bad? No, as long as you don’t have a disease related to it and you take a reasonable amount.

Is leverage bad? No, if you have it account and it is not too high. If you incur excessive leverage to trade Forex, sooner or later you will end up with huge losses. Even if you win at first, you will end up losing. Use leverage to get more with less and diversify to get better results.

The brokerage industry sells it as a panacea for beginners, where they advertise that you can make a lot of money with very little. As we have already seen, this may be true, but what they don’t usually tell you is the B side of the coin.

4. How to calculate the size of a trade in Forex

If you are starting out in Forex, don’t get overwhelmed with the issue of pips and lots, it is much easier than it seems. An example to see it, with starting data that we need to calculate how much we are going to trade for a reasonable level of risk.

  • Risk per trade: 1%
  • Stop loss: 50 pips
  • Account balance: $1,000
  • Currency pair: EUR/USD

We first calculate our assumed risk in dollars: 1% of $1,000, $10.

As our stop loss is 50 pips, we will calculate the value
of the pip.

$10/50 pips = $0.2/pip.

Now we only have to know with what amount we are going to operate
so that each pip is worth 0.2 dollars.

Our trade size = $0.2/pip / 0.0001
(Pip size) = $2,000.

Now we know that to take a risk of $10 with that stop level in EUR/USD we have to open a trade of $2000, 0.02 lots or 2 micro lots.

I know you are thinking that this is all bullshit and doing it every time you open a trade is impractical. This is one of the reasons why I do algorithmic trading and I recommend that you do too. But for now Here is a tool that makes these calculations much easier.

No more excuses for not knowing what leverage you are using and calculating risk accordingly. If you have any doubts about the concepts that we have discussed or you want to review the Forex market, take a look at these two articles:

Trading dictionary:

Forex Trading Course [Guía para principiantes]:

Thanks for reading me

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