Forex trading can enable you to access high leveraged markets with the hope of finding profitable opportunities, providing you have the right broker. Our guide to the best high leverage Forex Brokers in 2020 looks into this popular trading strategy and how it can help you generate wealth.
Using leverage in Forex trading is a way for companies and Forex brokers to open opportunities for larger trade volumes of currency pairs with an initially small balance. For traders with limited capital, this is a chance to enter the highly lucrative Forex market with no significant investment upfront.
What is Leverage?
Leverage is a financial tool offered by some Forex brokers that allows traders to multiply their position sizes. This essentially means that the trader is using the leverage strategy or “borrowed” capital as a funding source in his or her trades.
Using the method of leverage trading presents an opportunity to open FX positions with minimal amounts of margin funds. While not without its risks, high leverage trading can be useful to traders employing aggressive trading strategies or to those who need to open a large number of trades simultaneously.
How does Leverage work?
The leverage level of a broker is usually expressed as a ratio. It demonstrates a particular percentage of the total available capital that a trader is required to have in their account (e.g. leverage 1:100 requires 1% margin).
Trading with leverage is common and simple as the only requirement is for a margin minimum held by the trader. It establishes the amount of money a broker requires from a trader to open a position and is expressed in percentages.
So let’s look at how leverage trading works:
A trader wants to open a trade with a contract size of 100,000 per lot but does not have the $130,000 to put down.
Using leverage of 1:500, he or she can dramatically reduce the amount of capital required.
$130,000 / 500 (leverage used) = $260.00 required capital
Using this leverage size, we can use a simple formula to work out the amount of investment needed:
Buy trade: Ask price x contract size / leverage
Sell trade: Bid price x contract size / leverage
1 lot = 100,000 contracts (contracts worth is based on the underlying instrument which in this case is GBP)
GBP/USD, 100 000 Contracts are worth 100 000 units of GBP.
Guide to find a high leverage broker?
There are many Forex brokers in the marketplace that offer high leverage trading. To make an informed choice, it’s best to consider several factors:
- Do they offer a demo account?
- What trading platform are they using (MT4/MT5)?
- Where are they regulated?
- What platforms do they offer?
- How much leverage do they offer?
- What are the fees and on-going costs?
Which brokers offer High Leverage?
Some Forex brokers limit the maximum leverage on currency pairs to 1:25, 1:50, or a similar ratio. Obviously, these brokers are acting outside of jurisdictions imposing such restrictions. Current maximums on Forex instruments that regulated Forex brokers in the US may offer only leverage of 1:50, while the European broker under ESMA allowed using only 1:30.
It is not uncommon for some high leverage Forex brokers to offer accounts in their offshore subdivisions with a much higher leverage under the same company management.
It is recommended to look into the average leverage offered across different asset classes to get a feel for what’s reasonable. For example, the maximum leverage for various financial instruments and commodities may look as follows:
Forex – 1:500
Metals – 1:500
Indices – 1:200
Energy – 1:200
Crypto – 1:100
Pros and Cons of High Leverage
Forex trading and High leverage pair well together as the number of people interested in entry into the speculative financial markets increases. As with every other financial instrument, there are inherent risks, but when handled with caution – high leverage trading on the Forex market carries certain advantages.
- It opens opportunities to trade larger volume of currency pairs with an initially small balance.
- Traders can use “borrowed” capital as a funding source for Forex trading.
- Multiple respected authorities like US FMA and CFTC, Australian ASIC and European ESMA oversee and issue regulatory guidance on high leverage trading.
- Free demo accounts to learn before trading with real money.
- It opens access to many new markets, previously unaffordable for small traders and investors.
- Minimal margin requirements.
- There is a high potential to lose funds more easily.
- Some Forex brokers offer unreasonably high leverage ratios (alike 1:1000)
- Many offshore brokers who circumvent industry and regulatory standards.
- Traders are prone to taking higher risks to ‘win big’.
Calculating Profits in High-Leverage Trading
Leveraged Forex trading extends certain margin privileges to traders in good faith as a way to facilitate more efficient trading of currencies. This means it is essential that traders maintain at least the minimum margin requirements for all open positions at all times in order to avoid any unexpected liquidation of trading positions.
While high-leverage Forex trading carries certain risks – it also opens greater possibilities to accessing bigger lots and making greater profits.
If you wanted to open a position size of $10,000 (0.1 lots) and trade without leverage, you’d have to have at least that amount in your account. While the risk depends on your stop loss, let’s assume a 20 pip stop loss of 0.1 EURUSD is a risk of about $30, which is roughly 0.3% of the $10,000 position size.
If you’re trading with a leverage of 100:1 and have entered a $100,000 position, the broker will set aside $1,000 from your account. The 100:1 leverage means you are now controlling $100,000 with $1,000.
Let’s say the $100,000 investment rises in value to $101,000 or $1,000. That means your ROI is 100% ($1,000 gain / $1,000 initial investment).
Can all traders use High Leverage?
While all Forex broker clients can use some form of leverage, not all can use high leverage to trade. Following the 2018 measures to protect retail clients, ESMA does not consider highly leveraged trading to be suitable for all investor types.
Retail clients are those who enjoy lower leverage and higher protections while professional clients have access to higher leverage and fewer regulatory restrictions but are confident they can manage the risks that go along.
ESMA has put in place various intervention measures on CFDs, including establishing the maximum leverage limits available to the different client classifications, based on the trading instrument.
For Retail client leverage limits are:
1:30 (3.33% margin) for Forex majors
1:20 (5% margin) for main index CFDs, forex small caps and gold CFDs
1:10 (10% margin) for other commodity CFDs except gold
1: 5 (20% margin) for individual stocks (equity CFDs) and other underlyings
1:2 (50% margin) for CFDs on cryptocurrencies
For Professional client leverage limits are:
Up to 1:500 (0.2% margin) for forex majors, forex minors, some indices (ASX200, DAX30, DJI30, FTSE100, NQ100, SP500), and some commodities (gold, silver, XAUAUD, WTI and BRENT)
Up to 1:200 (0.5% margin) for remaining indices and bonds
Up to 1:100 (1% margin) for remaining commodities
Up to 1:25 (4% margin) for forex exotics
UP to 1:20 (5% margin) for individual stocks (equity CFDs) and CFDs on cryptocurrencies
What are the main leverage ratios?
There are various levels of leverage and their use depends on the types of broker accounts and capital owned by the traders. Generally, the top most popular leverage ratios are:
Can US traders use high leverage?
US Forex brokers are very restrictive in the leverage they offer, especially following the financial collapse in 2008. As per the Commodity Futures Commission (CFTC) rule from October 2010, the maximum leverage available to US residents is 50:1.
The Dodd Frank Act further prohibits US clients from trading Forex with a counterparty that is not regulated in the US.
Risk Management with Forex Leverage
There are widely accepted rules that investors should review when selecting a leverage level. The three basic rules of leverage are:
Maintain low levels of leverage.
Use trailing stops to reduce downside and protect capital.
Keep positions small and limit capital to 1% to 2% of the total trading capital on each position taken.
When you follow these rules, you can better manage leverage. New traders should be cautious about the Forex leverage level they select and make a choice based on their trading experience, risk tolerance and comfort when operating in the global currency markets. Remaining conservative and trading only with the best high leverage brokers in 2020, is a good start to start building experience.
For more brokers of different trading conditions, we’ve pulled together the best brokers for each:
- Tightest spreads
- Guaranteed stop losses
- CFD brokers
- 5-decimal trading (most brokers now offer this)
- Fast execution brokers
- Best brokers for scalping
- Best brokers for trading the news