Experts have different opinions on the best way to trade Forex. If you ask on social media, you’ll get answers in favor from people who prefer high-risk, high-reward strategies, and arguments against it from people who prefer playing it safe and using low-risk, low-reward ones. For a beginner, this may seem confusing, but that’s exactly the beauty of Forex trading: that you don’t have to follow a set path and you can choose your own trading strategy, depending on how many funds you have available, how experienced you are, and how comfortable you are with risk. A strategy that worked for a friend, or an experienced trader you follow online, might not necessarily work for you, which is why it’s important to be informed, know yourself, and carefully weigh the pros and cons of each trading style before deciding to give it a try.
High-leverage trading is a strategy that many professionals swear by and, when done right, it can really help you build wealth. That being said, it’s not for everybody, and there are a few things you should pay attention to.
What is high leverage Forex trading?
Broadly speaking, leverage allows you to control something big with something small. In finance, leverage means using borrowed funds to increase your trading position, and it’s also known as margin finance. In other words, the Forex broker boosts your account with funds you may not have available, and you can use this as an investment. The higher the leverage, the less capital you need to start trading. Every broker has their own leverage, which can start from something like 1:2 (for every $1 in your account, you can place a trade worth up to $20), but it can go as high as 1:3000.
Depending on the leverage, the minimum deposit amount will vary. For example, the average Forex broker has a leverage of 1:100, which means that for every $1 in your account, you can trade worth up to $100, and the minimum deposit is somewhere around $2,000.
High leverage trading has benefits for both traders and brokers: on the one hand, traders can amplify their returns even if they have limited capital, while brokers can attract more traders this way.
Pros of high leverage Forex trading
As you may have already guessed, the biggest advantage of choosing a high leverage broker is that you can make bigger profits even when you don’t have a lot of capital available. High leverage trading is one of the things that makes Forex more approachable for people who may not have enough money to start with. In the past, Forex trading was an elitist activity reserved for affluent individuals; for the rest of the world, the barriers of entry were too high. If you didn’t have lots of disposable income, it was simply out of reach. Through high leverage trading, even a person with lower capital can make huge returns. Plus, you won’t pay any interest for the “loan” you get from the broker.
When used correctly, high leverage trading can generate massive profits. In the best-case scenario, having just $100 in your account can win you $100,000, provided you focus on low volatility markets, and you take into account the 3% exposure rule. Ultimately, the goal of every Forex trader is to maximize profits, and having a high leverage account can help you do that.
However, high leverage isn’t the be-all and end-all of trading. In the right hands, it can help build wealth with a minimal investment. Problems arise when traders, especially beginners, don’t understand risk and abuse leverages. To make an informed decision and figure out if high leverage trading is right for you, you also need to be aware of the possible drawbacks.
What are the drawbacks?
High leverage Forex trading is a high-risk strategy, and you’re probably familiar with the phrase “high risk, high reward.” It’s possible to make a lot of money with $20 in your account, but, at the same time, you also risk losing a lot of money if you’re not careful. The idea of high leverage trading is definitely tempting, and there are many success stories that make beginners want to give it a try.
However, success isn’t guaranteed. Trading is by no means a get-rich-quick scheme, and there are no magical shortcuts. In the end, high leverage trading is a tool, so you still need to know if it’s right for you and when is the right time to use it.
When you’re just starting out with trading, higher leverage may seem attractive, but you shouldn’t take wild risks unless you know what you are doing. As a beginner, it’s a much better idea to start slow, invest in your education, and stick to a leverage of a maximum of 1:50 until you gain more experience. Alternatively, you can keep a small trading account with high leverage so that if you do lose money, the losses aren’t crippling. Many professionals stick to lower leverage because this protects their capital in case they make mistakes.
If you jump straight into high leverage Forex trading without knowing the risks, not only do you risk losing your capital but also making bad decisions driven by emotions that will sabotage you financially in the long run.
The bottom line
As a final word, knowing when to trade with high leverage and when not to is itself a skill. In the right hands and at the right time, high leverage Forex trading can help you win more, with minimum investment. However, if you abuse it or resort to it as a beginner, you can have a bad time. Ideally, high leverage trading should be used with caution and, when you do use it, you should never take more than two trades at the same time, and you should avoid it for high volatility markets such as cryptocurrency and CFD markets (gold, crude oil, etc.).