Leverage has long been known as a double-edged sword; on the one hand, can provide convenience, but on the other hand, can increase the risk of loss. But did you know? leverage risk depends on its utilization. If you use leverage wisely, even with high levels that are considered dangerous, you don’t need to worry about the risk of getting a Margin Call (MC) quickly. So, how do you take advantage of safe forex leverage?
1. Don’t Be Greedy in Choosing Leverage Actually, how much is safe forex leverage? Questions like this often cross the minds of beginners who are just beginning to understand the dangers of high leverage. Usually, they will be stuck in a dilemma; between choosing low leverage that does not provide many trading opportunities with small capital or sticking with high leverage which is said to be risky, for more information eToro.
Some sources say that the ideal leverage is not more than 1:200. However, the choice of leverage can be more flexible than that. If you do have a rational need to trade with high leverage and can combine it with careful risk management, then it is perfectly fine to use leverage higher than 1:200.
Therefore, the key to choosing safe forex leverage is an adjustment to your needs and your readiness to take risks. For example, you have a capital of $100 and a risk tolerance limit of 1% of the balance per trade. That means you need to open a position with a size of no more than $10. If you follow the example calculation in this article, then you have 3 options: Choose maximum leverage of 1:200, but open a position with micro lots. Choose leverage higher than 1:200, and can open positions with mini or standard lots. Choose leverage higher than 1:200, but open positions with micro lots. Of course, the biggest advantage is in the second option. However, the risk of loss is unmitigated. If you are not ready for a loss of $1 per pip and it is still easy to violate trading discipline, then we recommend using the first option. However, if you want to maximize profits, are experienced, and are not easily tempted to overtrade, then the third option can be the ideal solution.
2. Avoid High Volatility The safe use of forex leverage can also be sought from the trading system settings. This is because the danger of high leverage usually comes from price volatility, which can be avoided by structuring the system based on specific pair and time preferences, for trial you may use a demo account.
How could that be? When you open a position with a large accumulation of lots because it is possible by high leverage, you are also unknowingly increasing the risk of loss. Well, this risk is not always the same every time and the pair used. Traders who use cross pairs are usually more vulnerable to being harmed by high leverage, as are those who like to trade when there are high-impact news releases. This is because prices often move faster than expected, so when trading positions are losing money, Stop Loss or even Margin Calls will be more easily ‘touched’.
Thus, if you do need leverage higher than 1:200 and want to manage it safely, you should avoid high volatility. Two ways that can be done are choosing a trading pair with a small range of price movements and avoiding trading when the market is being crowded by high-impact forex news. To find out changes in the price range per pair, you can use the forex price movement table tool.
3. Beware of Broker Policies Regarding Floating Leverage Beyond our capacity as traders, broker rules also affect the safe use of forex leverage. This is because in some brokers, leverage is applied in a floating manner, so there are certain times when the broker reduces the leverage of its traders.
This policy is normally carried out to limit uncontrollable risks, ahead of holidays or events that are expected to have a super large impact. Some examples are the Brexit referendum, the Italian election, the US election, and the like. Reflecting on the experience of bankrupt brokers after the SNB bombing, a decrease in leverage can indeed reduce losses, for example, a market panic causes security tools such as Stop Loss and Margin Calls to not work. In this case, the safe use of forex leverage is of course to choose a forex broker that provides Fixed Leverage. Therefore, it is better to study carefully how the leverage policy applies to your chosen broker. If the official information on the broker’s website does not specifically mention leverage (whether Fixed or Floating), then pay closer attention to the additional information included at the bottom of the site.
Example of Floating Leverage Example of a Floating Leverage policy at broker forex If you still choose a floating leverage provider broker because you are tempted by other facilities then doesn’t forget to always listen to the latest info from forex brokers. This is because not a few forex brokers provide circulars to their clients first, before changing the minimum leverage and margin specifications. If the broker doesn’t issue an announcement, then stay alert by reducing positions, or closing all positions ahead of a high-impact event.