Pros and cons of high vs. low leverage
High leverage is one of the main attractions of the foreign exchange market, allowing traders to trade larger positions with smaller amounts of capital. Higher maximum leverage ratios will allow South African traders to open larger positions in forex markets, increasing their chances of earning larger potential profit.
This is done when the broker offers a loan to the trader, requiring that the South African trader pay a margin requirement as collateral for the trade. While this tool is a trading advantage, leverage comes with increased risks.
Using a high maximum leverage ratio can result in larger losses and it can often clear out the trading account. Apart from using risk management protocols, traders are urged to use educational materials to ensure that they know how to trade using leverage and margin.
Another protective measure when trading with leverage is to ensure that the retail trading account has negative balance protection applied, protecting the investor from a negative account balance. South African brokers offer generous amounts of leverage and South African traders are not restricted from using high leverage ratios.
Therefore, we have compiled a comprehensive list that features some of the best forex brokers in South Africa that offer high leverage.
Pros and cons of high vs. low leverage
To master the art of trading foreign currencies, one must have in-depth knowledge of the economy and political climates of various nations, as well as global macroeconomics and the influence that volatility has on certain markets.
But the fact of the matter is that economics and international finance aren’t typically what causes first-time forex traders to make mistakes. Instead, a fundamental lack of information on how to make use of leverage is frequently at the base of trading losses.
In this article, we explore the advantages and disadvantages of using either high or low leverage, as well as how to mitigate the risks involved with using leverage with brokers like Khwezi Trade.
When to use high leverage
High leverage is essentially a personal perspective, however higher leverage is generally considered to fall between a ratio of 1:400 to 1:1000 and higher.
Using high leverage can be a good strategy when trading on a smaller account. In the world of trading, leverage generally refers to money that is borrowed.
Leverage is a tool provided by brokers that enables traders to open larger positions in the market than their current account balance would normally permit.
The most appropriate leverage for a small account is the kind that enables you to open sufficient positions in accordance with your trading strategy without putting you in danger of receiving a margin call during volatile conditions when the market moves against you.
This can be anywhere from 1:100 and 1:1000 for accounts that are between R100 and R5000 in value. Remember that one standard lot in foreign exchange (1.0) is equal to 100,000 worth of the base currency, and one micro lot in forex (0.01) is equal to 1,000 worth.
You will require at least approximately sixteen thousand rands in order to establish a 0.01 lot size position on the , and you won’t be able to add any additional trades if you don’t use leverage. A single position with a lot size of 1.0 will cost you a total of R160 000 to open.
Retail traders with modest accounts who would normally be excluded from the market are given the opportunity to participate by brokers through the use of leverage.
Everyone trading with less than sixteen thousand rand, those trading with one hundred and sixty thousand rand, and those trading several positions are included in this category.
Advantages of using high leverage
Ability to make higher profits
You can make more money with less work if you use high leverage in your trading strategy with brokers like Khwezi Trade.
Leverage’s primary function is to increase your profit from each available transaction by multiplying the stakes, regardless of the instrument being traded or the amount being staked.
To achieve the same result, you could spend more money in each position, but leverage works to ensure that you’re able to increase your available capital artificially, frequently hundreds of times over.
More efficient use of your capital
A higher profit per transaction also means better use of your capital because you can earn more money every transaction. Consider your capital as a yield-producing asset for the sake of argument.
Leveraging up will reduce the time it takes to make R1000 from unleveraged positions from two days to a matter of minutes, allowing you to reinvest your cash more frequently and use it to achieve the highest possible return.
Leverage has a tremendous impact on capital efficiency and ensures not only better potential profits in the short term, but also a considerably greater return on investment over a much shorter time period.
It can reduce the effects of low volatility
High leverage also has the effect of mitigating low volatility, which is an important consideration when trading forex. Because markets move in longer cycles than more stable instruments, the most profitable deals are frequently those that are most volatile.
Volatility tends to be lower in the forex markets because of the cautious character of currency traders and the limited number of external indicators that can predict currency price changes.
High leverage can help alleviate the stifling effect of low volatility by allowing for higher profits to be generated from fewer transactions. Leverage allows traders to profit from minor changes in market pricing, which can become significant when holding positions with high levels of leverage.
Disadvantages of using high leverage
Risk of higher losses
High leverage can be tricky since it facilitates larger losses. Even if you keep your gains and losses, leverage can wind up costing you a lot more than you paid for when you suffer losing trades.
The risk of margin call
There is always the possibility that you will fall short of your broker’s margin requirements.
As soon as you go below this percentage, your broker will initiate a margin call, which means your portfolio will be immediately liquidated in order to fulfill your obligations as far as meeting those commitments is concerned.
Positions which may have yielded huge profits are closed out early (creating an inevitable opportunity cost) in addition to liquidation losses that might recoup.
When it comes to managing your wealth, it’s important to remember that this is a constant danger posed by the presence of leverage.
When to use low leverage
Low leverage and proper capitalization allow you peace of mind because losses are smaller. Avoiding catastrophic losses is far more important than chasing profits in a market with unlimited opportunities.
Trading in volatile markets necessitates a low-leverage strategy for this same reason. It is possible to be exposed, but not overwhelmed by its potentially overwhelming dangers, with minimal leverage.
Advantages of using low leverage
If you’re new to trading, you should know that leverage can be just as risky as it is profitable. It can help you gain more, but it can also cause you to lose more.
This means that the risk of losing money is greatly reduced when you have a lower level of leverage. Also, even if you lose a transaction, because of the low leverage, you can keep trading for a longer period of time with brokers like Khwezi Trade.
As leverage increases, the less room the market has to move before a margin call occurs. That’s why a lot of beginner traders begin with modest leverage.
Capital can be recovered more easily
When it comes to online trading of financial instruments and digital assets, it is impossible to avoid incurring losses. To be successful in trading, all that is required is for your profits to be higher than your losses.
The use of minimal leverage enables traders to recover their capital losses in the simplest and quickest manner feasible.
Reduced transaction cost
The transaction expenses involved in using leverage are one of the lesser known disadvantages. When it comes to trading CFDs online, spreads are typically of no consequence. However, the fees can pile up quickly when you use leverage, which can limit your profitability.
A lower leverage helps to keep your exposure low, which limits the size of the swings when the market is volatile.
You can also trade around unpredictable events, such as news releases, because the potential for widening spreads will not have a significant influence on the size of your bankroll.
In addition, you are able to open several transactions in a variety of markets without having to be concerned about incurring enormous transaction expenses.
Reduced stress when trading
When trading leveraged goods like contracts for difference (CFDs), emotions have been identified as one of the primary reasons why traders end up losing money. Emotions are a natural part of human life, but negative emotions can cause people to make poor decisions in the market.
When you have overextended your account and are staring at a loss that is going to wipe out your account, you have a greater chance of giving in to negative emotions such as fear, greed, and bias. This is because you are more likely to feel powerless in these situations.
You will have the mental clarity necessary to make objective trading decisions in the market if you engage in trading with a low leverage ratio.
Disadvantages of low leverage
Reduced chance of profits
When trading with low leverage you are only able to open smaller a position than you would of trading on higher leverage. Opening smaller positions means that your chances or earning higher profits are reduced.
Leverage is a tool that is used by traders to open larger positions than they would be able to using their own deposited funds. As such, the use of leverage allows for greater flexibility and access to more profitable trades on the Forex market.
There are advantages and disadvantages to using both high and low leverage, but deciding which to use ultimately comes down to your level of trading experience, the amount of funds you are able to risk, and your trading strategy.
To this end, when using leverage you should always have a risk-adjusted strategy in place in order to ensure that you can mitigate your potential losses as far as possible.