How to choose Forex leverage
The correct answer to the question of how to choose leverage in Forex allows you to not only significantly reduce the amount of funds required for trading but also mitigate risks.
Typically, the leverage amount is set when registering a new account, so you need to decide on its size right away so that you don't have to do all the steps a second time.
To choose the right Forex leverage, you should consider several key factors for your upcoming trading: the duration of your trades (time frame), the amount of funds at your disposal, and your risk level.
The primary goal of any trader is to maximize profits, and profits directly depend on the volume of trades. Based on this, we will attempt to determine the maximum allowable leverage based on trading parameters.
Trade duration – if you trade on short timeframes, the profit from one trade rarely exceeds a few pips, so the higher the value of one pip, the more you will earn.
How to choose the best leverage based on the holding time of open positions?
On short time frames, the maximum amount of Forex leverage is acceptable. For example, with a deposit of $30 and a leverage of 1:500, you can open a trade of 0.1 lot, resulting in a gain of approximately one US dollar per pip movement.
At the same time, you don't need a highly stable deposit to withstand exchange rate fluctuations; scalping transactions usually close with losses of just a few pips.
Over long trading periods, there is a possibility of large pullbacks, even if the trend direction remains the same, so in this case, you should choose leverage of no more than 1:50 or 1:100.
Deposit size – if you have a limited amount of funds at your disposal, you'll naturally want to increase them by any means necessary. Therefore, you'll be forced to choose the maximum possible leverage. This will be the most appropriate move in this situation.
How to choose the optimal leverage based on the amount of funds in your trading account?
But if your funds allow it and you don't want to take risks, then the right decision would be the lowest leverage. This approach will allow you to wait out any storm without closing the deal at the slightest correction in the trend movement
You can estimate the risk level for your broker using a demo account with the planned deposit amount. Again, the pip value and trade volume play a role. If you open a 1-lot trade with only $1,000 in your account and use high leverage, then a 70-pip swing against you will result in a $700 loss, and the trade will likely be automatically closed.
Therefore, balance the level of risk and the size of the trades you open.
Choosing Forex leverage is a rather complex matter. When choosing, you first need to determine the riskiness of your trading, as well as the duration of your trades and the correction rate for the given trading instrument. The higher these two indicators, the lower the leverage used.
