Does higher Leverage in Forex Trading help?

Higher Forex Leverage may or may not help the Forex trader but it certainly does help Forex broker. Let me explain why.

When you open a position, Forex broker requires you to put aside certain amount from your account balance called Margin Requirement.  This margin requirement is based on the leverage the Forex Broker has provided you with.

Say you have a $10,000 account and your Forex broker has provided you with 100:1 leverage.  When you open a $100,000 position you would be required to put aside $1000. If the position goes against you then you will have until -$9000 to hold the position. Any further loss and you will get a Margin Call and your Forex broker will automatically close the position leaving you with $1000 that you initially put aside.

Now here is the good part. The higher leverage you have, the less money you put aside per trade. Forex brokers know that most new traders will eventually lose all of their money and they want to you to end with the least amount of money in the account. So if you are trading with 400:1 then you would end up with $250 in your account in above scenario.

Now say you are an experienced trader and you know all about Money Management.  You have decided not to risk more than 3% per trade and hence maximum loss you would take is $300. It doesn’t matter what leverage you have because you will always have sufficient funds left in your account even after taking loss. Even if you want to open multiple positions at the same time you won’t need leverage higher than 100:1 You may also want to look at “Forex Money Management : A new Approach

Higher leverage is not all bad news. It does help in one scenario. When starting off a lot of people don’t like to invest a lot of money. Say you want to start only with $500, in such case a Micro account 400:1 leverage can help to get you started. You can then perhaps open a $1000 position with only $2.5 margin requirement.

You may also be interested in reading “Margin Call

Chris Farnworth is an independent Forex and Commodity trader with many years’ experience under his belt. He travels and works from around the world trading and writing content for various websites and blogs. In his spare time he enjoys scuba diving and surfing.

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7 Responses to “Does higher Leverage in Forex Trading help?”

  1. tradingfan 11 November 2008 at 7:39 am #

    Thanks for this blog posts. I was actually, not sure about the leverages in forex trading. Also, i was looking for a blog post that will help me to understand what the leverages are, and your post solved all my queries.

  2. admin 11 November 2008 at 6:46 pm #

    Happy to help Tradingfan :)

  3. Fx-trader 14 November 2008 at 8:12 am #

    The same problem was with me also. Then i took help of some video and journals about leverages. however, the blog is also worth to learn, but still if tradingfan if you need more help on this topic, just type leverages in forex on youtube. and you will get your answer.

  4. Fx-trader 3 December 2008 at 6:12 am #

    Though higher leverage helps forex broker but, it indirectly helps to forex trader so, I agree with your saying that higher Leverage is important in forex trading.

  5. Forex Trading Easy 8 April 2009 at 11:38 am #

    Im actually using higher leverage 500:1 in fxpro. so far I'm profit.. btw thanks for the good post.. maybe I'll start using lower leverage after this

  6. Alex 17 September 2009 at 2:52 pm #

    Well forex robots can definately help you learn better & analyse the markets.

    However not all forex robots work, if you’d like to know more come visit us on out site.

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