This article shows how you can be benefited by selecting the greatest possible leverage on offer by a broker. This has to do with the relationship between Leverage and Margin.
Before I explain this concept I need to quickly explain the terms Leverage, Margin and Margin Level.
Leverage is the ability to increase your maximum trading size by a multiple of your account’s balance. Leverage is expressed in the form of a ratio, eg 1:400 or 1:50. A leverage of 1:500 will allow an account whose balance is 100 Euros to trade up to 50,000 Euros.
The reason leverage is offered is because in FOREX trading you trade on a Margin.
Margin is defined as the amount your account balance needs to have in order to open a position. It is calculated as follows
Clearly as the Account Leverage increases the Margin Decreases
Similarly once a position is opened your account’s equity needs to maintain a given Margin Level. Margin Level is calculated as follows and is measured in percentage.
Once the Margin Level drops below a given level set by the broker (eg 100%,50%,20%) you will be given a Margin Call and if it keeps dropping your account positions will be automatically closed to prevent further losses.
Obviously you want the Margins to be as small as possible as it will allow you to maintain a higher Margin Level and hence be able to maintain open positions longer and avoid Stop Outs.
YOU CAN ACHIEVE THE ABOVE BY SELECTING A HIGHER LEVERAGE.
Higher Leverage -> Lower Margin -> Higher Margin Level -> Smaller Chance for Margin Calls
This example shows how one account that that has the same equity and trades the same volume as another account by having a greater Leverage (5 times) can maintain a greater Margin Levels (5 times ) and reduce the chances of a Margin Call.
I am pretty sure that you may have read or heard the following Risk Warning
Selecting a higher leverage will allow you to make greater profits with a small investment but at the same time can amplify potential losses and quickly drain your account without proper risk management. Therefore it is generally advised to select a lower leverage.
But just because you have selected to have available the biggest possible leverage offered this does not mean you will have to trade the maximum size your leverage allows you. That will be extremely risky and unwise.
So Always Seek to Highest Possible Leverage but be careful on not to overuse it.
The following brokers offer high leverage.