How to choose the best leverage level

Archimendes said: “Give me a fulcrum, I can lift the whole earth”. This is the earliest appearance of the concept of leverage. The word leverage dates from 1724 and was originally used to describe the action of a lever. By 1824, by which time the Industrial Revolution was fully underway, the scope of the word had expanded to include the power of a lever and therefore the obtaining of a mechanical advantage.

It is simple to say that if you want to invest $10,000 in the forex market, you can to it by leverage with small investment. Leverage is a financial tool, which can magnify the result of your investment, including gain or loss at a fixed ratio.

For example: You invest $100 in forex market at a leverage ratio of 1: 100. When $10,000 goes up by 1%, you can earn $100, while falls by 1%, then you will lose the whole principal. Leverage is a double-edged sword that makes you get rich or lose everything overnight.

Jesse Lauriston Livermore was an American stock trader. He is considered a pioneer of day trading and was the basis for the main character of Reminiscences of a Stock Operator, and he was one of the richest people in the world.

In 1929, the US economy continued to raise. The stock market became a national recreation market, and people were blindly optimistic about the US economy. Under the situation, Livermore predicted the stock market would fall later. As predicated by him, stocks fell and a lot of banks went bankrupt. Livermore mortgaged his house and yacht, raising a total of $30,000,000, and sold short shares worth of US$750 million at a leverage rate of 1:25. He took 21 days to sell short the top 100 U.S. stocks by building positions in batches, totaling 450 million dollars, with extra $300 million used to increase positions. Finally he earned $100 million within nine days.

The following are Livermores investment history records:

October 21, Monday, the U.S. stocks opened sharply lower, down 6%. Livermore made first profits on his position.

October 22, the slight retreat in market sparked profit-taking.

October 23, Wednesday, the shares tumbled in heavy trading. Livermore sold a quarter of shares and gained US$8 million with US$20 million paper profits.

October 24, Thursday, stock market saw a panic slump. Livermore closed half of the position in the chaos and earned himself US$14 million. He added US$100 million into the short-selling position later as the market staged a powerful late rally. (The day was to be known as “Black Thursday” in U.S. history ).

October 25, president Herbert Hoover came forward to appease the market, and then the market stabilized in the short term. But Livermore took it calmly.

October 28, Black Monday, the Dow fell 14%. Livermore added another US$50 million short.

October 29, Black Tuesday, the stock market crashed, down 19%. Livermore closed all positions and made a profit of US$93 million!

In 1929, the revenue of the federal government of the United States was only 4.03 billion dollars. Based on 3.32 trillion dollars revenue of the government in fiscal year 2017, Livermore made a profit of 100 million dollars in 1929, equivalent to 82.38 billion dollars today!

Not all people are as brave and wise as Livermore, whose constrarian strategy is always fraught with risks. Generally speaking, few people has the ability.

For a forex trader, is it better to choose large or small leverage？

Leverage is only related to the margin when you trading, with leverage size itself not making any sense, which means the fund will not change according to the size of the leverage. The risk of leverage also comes from many factors, including heavy trading, not evaluating credit levels, not setting stops and planning your own transactions, etc. In fact, the choice and application of forex leverage differ from man to man, and it should match with the investment situation, trading technology and mentality of investors.

Generally forex brokers provide different leverages, including 1:100, 1:200, 1:400, 1:500 and even 1:1000, 1:2000. As we all know that the standard contract in forex market is $100,000 per lot. Thus the price of one basic point (0.0001) is $10. For instance, we have $6,000 in an account and buy one lot betting on the fall of EUR/USD (one basic point is $10).

1. If you use 1:20 leverage, you invest $5,000 into the market, and there is $1,000 left in your account, which is available to be used to deal with the risk of 100 basic points. When the market price goes up, resulting in 100 basic points loss, these $1,000 will be used for forced liquidation by system when you receive the margin call.

2. If you use 1:100 leverage, you invest $1,000 into the market, and there is $5,000 left in your account, which is available to be used to deal with the risk of 500 basic points. When the market price goes up, resulting in 500 basic points loss, these $5,000 will be used for forced liquidation by system when you receive the margin call.

3. If you use 1:400 leverage, you invest $250 into the market, and there is $5,750 left in your account, which is available to be used to deal with the risk of 575 basic points. When the market price goes up, resulting in 575 basic points loss, these $5,750 will be used for forced liquidation by system when you receive the margin call.

It can be summarized that the more the reserve funds in the account is, the stronger the anti-risk ability becomes, the higher the profits are. But for margin trading, the leverage proportion magnifies the trading volume, which in turn magnifies the risks and returns! Leverage proportion is just a means, and the risk comes from the proportion of your position (number of lots) to your account! In other words, you can only build the corresponding number of positions based on the size of the account.

For most traders, leverage is very attractive because they can use leverage to make high profits without spending too much of their own money, when the market is favorable. But they also need to understand that high leverage can lead to high profits as well as high losses, so they need to choose a suitable leverage and carefully analyze the return expectations of their investments and the affordable risks.

Some people control tools, while some ones are driven by tools. You must be fully prepared and deliberate before using leverage. Do not change your ideas, temperament or methods because of leverage, which is just a tool. In other words, choose the proper leverage size according to your affordability. For example, choose the suitable leverage size as per your family situation, source of income, resilience, future expectations and other factors. On the contrary, if you choose an unaffordable leverage size, you will be easily driven by it.

Leverage is an important financial tool to bolster social and economic development. It is a double-edged sword, and making good use of leverage can help you make high returns in your trading, or it will put you in a corner. It is worth thinking about how to get the maximum return within the acceptable range of risk for individual investors.

WikiFX, a third-party forex broker inquiry platform, has collected

the information of 19,000+ forex brokers, 30 regulators, and helped

victims recover over 300,000,000.00 USD. WikiFX App provides functions

like forex brokers inquiry, calender, forex news express, calculator and

other trading tools to help you get trading done with ease.

Forex brokers inquiry: in order to create a safe forex trading

environment, WikiFX offers you two methods of checking the compliance of

forex brokers, online checking and offline investigation report. WikiFX

has an independent inspection team, conducting on-spot visit to brokers

offices to identify they are trustworthy or not.

Forex calender: the financial events which may affect forex trading

Forex news express: providing you the latest info anytime and anywhere

Forex forum: tons of posts by WikiFX users, containing technical

analysis, industry discussion, fraud brokers exposure; Users can

exchange their thoughts here freely.