From the city that loves to trade, and I’m talking about New york city baby! My name is Kiana Danial, they call me Invest Diva, the go to investing adviser who helps you invest your money the right way. It’s time for yet another Q&A show where I give an A to a Q submitted by those who follow the currency pairs dancing on the forex dance floor.
Today’s question is from Gustavo Santos, who asks: How do I know what the right leverage is for me?
Gustavo this is one the most important questions anyone could ask when trading forex because as we have mentioned countless times on the Invest Diva’s education program, leverage is a double edged sword. When trading forex, you can benefit from something called leverage, which is a concept widely applied in the forex market to enable you trade larger amounts, with a small investment. You can imagine Leverage as a loan that is proportional to your investment but strictly used for trading, so you cannot cash it out to buy a car!
Depending on your account type or the country you’re trading from you can use up to 500 times your investment. Technically, this is called 500 to 1 leverage, which is much higher than a leverage you can apply when trading stocks. In stock trading, your maximum leverage is only 2 to1.
For example, if you want to make a500 thousand dollar trade, you can put in only 1000 dollars of your own, and your broker will give you the ability to control the 5 hundred-thousand dollar trade. As a result, if you make 0.2% return in your 500 thousand dollar trade, that is going to be 100% return on your own thousand dollar, right?
I know that you are now all amazed and excited and probably on your way to add a ridiculous amount of leverage to your trade, but please, first listen to me carefully when I repeat:
Leverage is a Double Edged Sword
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While you can get a significant return, leverage has the potential to bring you equally significant losses. So now getting back to the core question, how much leverage should you use?
Using leverage shows your risk appetite. And at Invest Diva we advise that your risk per trade should always be a small percentage of your total capital. A good starting percentage could be 2 percent of your available trading capital. For example, if you have $5,000 in your account, the maximum loss allowable should be no more than $100. By analyzing the market from all points of the Invest Diva Diamond analysis, you can stack the odds in your favor and then manage your risk per trade.
Managing risk per trade It is literally a combination of setting your stop and limit orders, and applying leverage. To make this calculation easy for you, at Invest Diva’s education course we introduced a magic formula that I’m going to share with you right here, right now. Here it goes:
Confused? I thought so. Here is the magic formula in simpler words:
So you can calculate your leverage by dividing your acceptable trade size, by the money you have initially put into your account.
Thanks again to Gustavo for submitting an awesome question, and if you have a burning trading question you need to be answered, Facebook us, Tweet us, Email us, Google us, or just come visit us in our office in NYC and ask it in person. Maybe the last one is probably a bit too much of a hassle though. I’ll see you next time.