The optimal amount of leverage for stock trading on different assets and timeframes
The amount of leverage often plays a decisive role in stock trading and is one of the most important aspects of trading.
An incorrectly chosen ratio of transaction volume to deposit will lead not only to an increase in profit, but also to an increase in risk.
Recently, brokers have begun competing with each other to offer the highest leverage possible; now, you can even open an account with leverage as high as 1:3000.
At the same time, the brokers' motives are quite clear: the larger the volume of transactions transferred by the brokerage company to the exchange, the greater the spread and commission that remains with the intermediary.
Leverage size depending on the timeframe
As has been said many times, the longer the planned transaction, the smaller the difference between the deposit and the order volume should be:
Leverage of 1:300, 1:500, 1:1000 and more are designed for scalping on M1 , when the duration of transactions does not exceed several minutes; trading with them on longer timeframes is quite difficult.
It is advisable to use a leverage of more than 1:100 for intraday trades, since when carrying over positions to the next day, a fee for carrying over the position – a swap – will be added to the paid spread.
If you plan to hold a position for a long time, a week, a month, etc., then it is better to limit yourself to leverage of 1:10 or less.
Leverage size depending on the type of asset
This is also a rather important point, since, firstly, for many assets, brokers themselves limit the maximum leverage:
Cryptocurrencies from 1:2 to 1:50,
securities 1:25,
commodity futures 1:100
Therefore, no matter how hard you try, you won’t be able to use the scalping strategy on some assets.
The highest leverage is available on currency pairs, and its size also depends on the type of account you are trading on.
The influence of the size of leverage on the size of the spread
It may come as an unpleasant surprise to many when, upon opening a trade, more than 50% of the funds are immediately debited from the account as a loss:
This happens when a trader doesn't carefully select a trading asset, as even for currency pairs, the spread can vary enormously.
For example, the EUR/USD spread is 5 pips in a five-digit quote, meaning you have to pay $5 for a 1-lot order, while the same broker charges 200 pips or $120 per lot for the USD/ZAR currency pair.
Imagine you open a USD/ZAR trade with a leverage of 1:500 and a deposit of $200, and the spread is $120.
Therefore, it is simply not rational to use high leverage on assets with high spreads.
To better understand how trading will work with a particular leverage size and on a particular asset, first experiment on a demo account .
