How to Choose Leverage in the Forex Market

When trading forex, how much leverage should I use? The issue of leverage in the forex market often causes a lot of confusion. What is leverage? How does it work? What are its pros and cons? Unfortunately, these questions usually go unanswered—unfortunately because excessive leverage is one of the biggest "killers" of forex accounts. In fact, I believe it’s the most critical issue.

The good news is, you’re reading this article. By the end of this lesson, you’ll understand what leverage is, how it works, and how much leverage you should use when trading forex.

What Is Forex Leverage?

Leverage in the forex market allows you to control a larger amount of money than your initial deposit. Let’s say you deposit $1,000. In the U.S., the maximum leverage is 50:1, meaning you can control $50,000 in trading capital. Of course, you can’t withdraw the extra $49,000 beyond your initial deposit, but you can use it to open positions.

We know that a $100,000 position is 1 standard lot, $10,000 is 1 mini lot, and $1,000 is 1 micro lot. So, if you want to open a $10,000 position (1 mini lot) with a $1,000 account, you should use 10:1 leverage. For every $1 you use to trade, your broker allows you to borrow $10.

Simple, right?

I could dive into all scenarios and equations, but I want to keep things straightforward. The example above is all you need to know about leverage in forex. It won’t help much, though, because you’ll soon realize that when managing a crucial aspect of trading, leverage isn’t the biggest factor—but its importance grows later.

Use the Lowest Leverage or None at All

Conclusion
Leverage is a double-edged sword. On one hand, it can increase profits, but on the other, it magnifies losses.

In my opinion, the best leverage is the lowest possible—or none at all. This is especially true if you’re consistently losing money. Using excessive leverage while losing will only deplete your capital faster. Many traders don’t realize they can choose not to use high leverage.

If you’re a beginner or a struggling trader, you should reduce leverage as much as possible. This will prevent overtrading and help you stay in the game longer.

While the size of your leverage matters, it’s not everything. In fact, leverage is somewhat irrelevant as long as you limit your risk to 1%–3% of your account balance. After all, 1% of $1,000 is $10, whether your leverage is 50:1 or 400:1.