Choosing the Forex broker you will trade for the next few months/years might be as tricky as choosing a car or any other valuable tangible good. As you don’t want to pay money for something that might turn out to be a complete scam. Therefore, you need to make thorough research and analyze every detail about the Forex broker before signing up with it. The research shall include various factors like the reputation of the brokerage, its regulation, but, most importantly, the trading conditions it offers. And one we will discuss today is the leverage and whether trading with the Forex trading brokers offering high leverage rates is a good idea at all.
Generally speaking, the topic itself is quite controversial and requires a two-sided analysis. Meaning that you need to realize that you need to understand first that high leverage can both lead to high-profit potential, as well as a high possibility of huge losses. Therefore, you need to decide for yourself if you are eager to bear the risks of trading with the high leverage FX trading brokers.
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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Forex trading market is known for being volatile and unstable. Thus, when we are speaking of high leverage, we actually speak of the whole essence of the market. As high leverage, just like mentioned before, can both benefit and defeat you at the same time. Usually, when we are speaking of the CFD brokers with high leverage provided, we mean that there are no minimum deposit levels imposed as well. Or those are just very symbolic.
Offering high leverage rates is disputable, as every other trader might perceive those ratios differently. For some of those even a leverage of 1:10 might be high. As in case of a successful currency trading, it will make the profits 10 times higher than the initial deposit. But, as the ratios offered by the brokers providing high leverage positions are a subject of constant discussions and arguments, some limitations were imposed on those by the governmental regulatory bodies of different countries. And we will speak about that in a sec.
When trading with high leverage positions, traders are obtaining the ability to increase their trading profits without depositing a lot. However, at the same time, it creates a possible base for potential losses. Nevertheless, even large organization and experienced traders are turning to that Forex trading strategy in order to generate wealth and mainstay on the leveraged offering.
But it became obvious over time that trading with high leverage is too risky. Thus, many regulations decided to limit the leverage offered by Forex brokers with unlimited leverage. US FMA, as well as CFTC and European ESMA, took necessary measures and limited the level of the leverage to be maximum of 1:50 for Forex brokers based in the EU countries and 1:30 for the ones from the United States. But things are not as strict with all of the jurisdictions across the world. For instance, Australian ASIC allows FX trading brokers to trade with the leverage rates of 1:400 and even 1:500. But those FX brokerages that were restricted from offering high leverage rates are often providing those on their offshore platforms.
But at the end of the day, the best safeguard for Forex traders is their cold heart and fresh mind. They need to realize that the Forex brokers offering 1:1000 leverage might drive those into the dark pit of debts and bankruptcy even.
Notably, the highest leverage rate that might be noticed on the market is 1:2000 and 1:3000.
You can actually easily calculate the margin-based leverage rate yourself by using the following formula:
Margin-Based Leverage = Total Value of Transaction / Margin Required
However, as the margin-based leverage barely helps you to predict what are your possible gains and losses are, you shall turn towards the real leverage that can be, in turn, calculated using the different formula:
Real Leverage = Total Value of Transaction / Total Trading Capital
Among the undeniable pros of trading with such Forex brokers are:
The whole essence of trading with high leverage positions lies in the fact that it enables traders to increase their profits with the minimum efforts being put in that. Of course, the same effect could have been achieved if they would simply invest more money into each position. But who wants to spend more money, if there is an option not to? Therefore, the high leverage positions were created to increase the initial deposits of Forex traders by hundreds or even a thousand times.
Yet another reason why many traders still decide to trade with high leverage stakes even knowing about its possible risks, is that it enables them not to spend huge funds on initial deposits. Meaning that in case you are smart, wise, and, well, lucky, you can earn thousands of dollars from a $10-deposit.
FX brokers high leverage examples include the fact that you can allocate your existing capital more efficiently and effectively. Meaning that it might take you several weeks or even a month to earn $500 on Forex trading if you are trading without high leverage stakes. But if you are doing the opposite, you can earn that amount after only one position.
By just offering an ability to generate higher profits out of lower investments, high leverage acts as a weapon against the high volatility of the market. Therefore, with that traders can benefit even from the slightest movements of prices on the currency market.
As already mentioned, high leverage is truly a double-edged sword. It can both benefit you greatly and help you earn huge profits, or defeat you completely and leave with no money. Therefore, we would also like to provide you with the list of cons that are coming with high leverage trading. Just to make you fully aware and informed about the situation.
High leverage trading offered by any of the brokerages from the list of FX brokers with high leverage, is all about stimulating you to gradually increase your deposits and stakes values. Therefore, even though you might earn a lot by doing so, one day you may end up losing much more than you gained and become bankrupt. So just keep in mind the fact that it is not only about winning with the high leverage Forex trading.
The things are not that easy when you are trading with high leverage positions as you have that constant liability in front of Forex brokers. No matter if your trades were high or down, you will still owe the broker a certain leverage stake.
The margin requirement imposed by the broker means that you, as a trader, shall be able to cover a specific percentage of your capital that is kept on your account. That might become harder to do with the high leverage positions though. And if by the end of a certain period you won’t be able to fulfill these requirements, then the Forex broker you are working with has any right to diminish your portfolio.
Another disturbing fact is that on top of the leverage you are using while Forex trading, you need to pay a certain interest. Logically, the more is the leverage you are trading with, the higher is the interest that needs to be paid.
That might be tightly connected with the first disadvantage of high leverage Forex trading mentioned earlier. That might be simply explained by the fact that when you are trading with high leverage you are borrowing money from the Forex broker, just like from the bank, in a way. For instance, if you have a leverage of 1:1, that means that you are trading with your own funds. But as we are talking about leverage rates like 1:1000 and even 1:3000, that is not the case. And naturally, people that can trade with someone else’s funds are feeling much relaxed and wind up. However, at the end of the day that will be you who will be obliged to pay off all the debts.
As you could already understand, high leverage is a two-sided medal. It has a number of great benefits and drawbacks at the same time. Therefore, while choosing whether to risk trading with high leverage positions or not, you shall analyze all of the aspects thoroughly and ask yourself if you are eager to risk your own money if something will go wrong.
The level of the leverage depends mainly on your Forex trading experience, risk tolerance, and familiarity with the global trading environment.
Generally, by following three simple rules you may limit the level of risk:
Hopefully, by following those you won’t end up losing your capital and owe anything to the brokerage.
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