Leverage is among the most important trading tools for many profitable Forex traders. It is also one of the most misunderstood concepts, and the amount of misinformation about leverage and risk is overwhelming. 1:500 leverage is the standard for major Forex pairs. I will begin by debunking the illusion that higher leverage results in higher risk and give Forex traders facts about leverage to help them understand it.
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What Is Leverage in Forex Trading
So, what is 1:500 leverage, and should you trade with high-leverage Forex brokers? Leverage defines the margin requirement Forex traders must pay to open and maintain a position. What is 1:500 leverage? 1:500 leverage is the standard leverage for major Forex pairs. Retail Forex trading would be impossible without leverage due to large trading volumes.
Here is an example:
- Assume you want to buy 0.10 standard lots in the EUR/USD at 1.0800
- 1.0 standard lot equals 100,000 currency units, meaning 0.10 lots are 10,000
- 10,000 x 1.0800 = $10,800
- Without leverage, Forex traders must have $10,800 to open a small Forex position (it would cost $108,000 to open a 1.0 standard round lot trade)
- With 1:500 leverage, Forex traders can open the 0.10 lot EUR/USD position for a margin requirement of $21.60 ($216 for a 1.0 standard round lot trade)
What Does 1:500 Leverage Mean?
1:500 leverage means Forex traders must have 1/500th of the total deal value as a margin requirement. For example, if the total deal value equals $100,000, Forex traders must have $200 to open and control the deal. Traders can also view it as controlling $500 for every $1 in their account.
Is 1:500 Leverage Worth the Risk?
Leverage does not increase risk despite popular opinion, regrettably shared by tier-1 regulators. The absence of risk management impacts risk. For example, if a trader sets a total acceptable loss per trade of 2% or $50, the risk remains identical with 1:1 or 1:3000 leverage. The pip amount a trade can move against a position before reaching the stop-loss trigger will decrease with higher leverage.
Is 1:500 Leverage Suitable for Beginner Traders?
Any leverage setting is suitable for beginners if they understand the relationship between leverage and risk management. Otherwise, beginners should not trade.
1:500 Leverage – Pros & Cons
The pros of 1:500 leverage include the following:
- Decreased capital requirements
- Increased capital efficiency
- Magnified profit potential
- Ability to trade Forex
- Increased flexibility
The cons of 1:500 leverage include the following:
- Overtrading
- Insufficient capital
- Inappropriate trading volumes
- Missing or inadequate risk management
- A fundamental misunderstanding of leverage
Bottom Line
What is 1:500 leverage, and should you trade with high-leverage Forex brokers? 1:500 leverage is the standard Forex leverage for major currency pairs, and Forex traders should consider high-leverage Forex brokers to ensure competitive trading conditions. Despite popular belief, higher leverage does not equal higher risk. The absence of risk management determines risk, but Forex traders must understand that higher leverage will decrease the number of pips a trade can move against them before a stop-loss level should exit the position. Finally, leverage also depends on the trading strategy and asset. Therefore, before deciding on leverage, traders must understand it and master risk management.
