The topic of money management gets a lot of attention and for good reasons. Some traders believe it’s even more important than the trading strategy itself. So, it’s no surprise that new traders on small accounts want to know the best leverage to use in their trading.
The best leverage for a small account is one that allows you to open enough positions based on your strategy without running the risk of a margin call. For accounts between $10 and $1000, this can be anywhere between 1:100 and 1:1000. However, leverage of 1:30 can also work for $1000 accounts.
The rest of this article will cover all you need to know about leverage for small accounts. You’ll learn the importance (or lack thereof) and how to decide what option to choose.
NB: This article is focused on leverage in forex (CFDs) trading, but the principles also apply in other markets where brokers offer leverage.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is Leverage?
Leverage is essentially borrowed money in trading. Brokers offer leverage to allow traders to open bigger trading positions than their account balance will ordinarily allow.
It’s often denoted as a ratio ranging from 1:2 to as high as 1:2000. Leverage of 1:500 means you can control 500x your trading capital in the market. So, on a $10 account, it means you can theoretically open positions worth up to $5000 or $500,000 on a $1000 account.
On that $10 account above, you can only open a maximum of five micro-lot positions (0.01 on five different trades or 0.05 on one position). For the $1000 account, you can open up to five standard lots in the same manner.
Keep in mind that one standard lot (1.0) in forex equals 100,000 worth of the base currency, and one micro lot (0.01) equals 1,000 worth. A mini lot controls 10,000 worth.
Without leverage, you’ll need at least $1,000 to open a 0.01 lot size position on EURUSD, and you can’t add any extra trades. You’ll need $100,000 to open just a single 1.0 lot size position.
Brokers offer leverage to attract retail traders with small accounts who would ordinarily be excluded from the market. This category includes everyone trading with less than $1000, those trading with less than $100,000, and trading multiple positions included.
Which Leverage Should You Choose for a Small Account?
There’s no generalized leverage to choose for a small account. Factors like your trading goals, overall strategy, and position size of the account should determine the leverage to use.
However, it’s often safest to choose the highest leverage possible with a broker if you have a small account and then regulate your risk by choosing the right position size.
Why Trading Goals, Position Size, and Overall Strategy Matter More When Choosing Leverage
Leverage is a tool in your overall risk management. Your risk management is a function of your overall strategy.
Therefore, if you have a trading strategy that can deliver 20 open positions in one go and an average loss and profit target of 10 pips each, you should choose leverage that allows you to trade all of them. Assuming 1% risk per trade (which is the widely recommended level or risk), entering all 20 positions will leave you at risk of losing 20% of your account if all those positions end in a loss.
On a $100 account, you’ll need up to 1:500 leverage to be able to take that number of positions. With leverage at 1:2000, you’ll have a sizable free margin remaining after taking all those positions.
Now, if you have a $100 account and simply want to grow it by 5% per month, you don’t need to take all the 20 recommended trades. You only need 5 of them to go your way to make 5% in a month. Another trader who wants to make 40-50% a month will take as many trades as possible, maxing out their free margin. Both traders may have the same 1:500 leverage, but their risk profiles are very different.
Similarly, two traders with different account balances, say $100 and $1000, can also have the same 1:500 leverage, with each using different position sizes to arrive at similar trading goals.
Therefore, it’s always best to use the highest leverage on offer to ensure you won’t run out of margin, then stick to a position size that allows you to continue trading in line without blowing past your stipulated risk.
Why Is High Leverage Discouraged?
High leverage is discouraged because it pushes traders struggling with discipline into risking too much money on positions. When traders can control their risk, high leverage is harmless and might help them achieve better results.
Most trading blogs and trainers preach against trading with high leverage because a small account holder will always be tempted to risk more money on each of their positions. Think about a scenario where you have a $100 account but have 1:2000 leverage. Your strategy might recommend only risking 1-2% per entry, but knowing that you can easily jump in with one full lot can lure you into destructive trading behavior.
Such a lack of discipline will make the trader jump into a trade with a standard lot, hoping to double their $100 account in ten ticks. What usually happens is that the ten ticks may end up happening in the wrong direction, leading to a blown account. Even trading five mini lots can blow the account in a 20-pip move.
Expert traders only look at the leverage on offer to ensure they’ll always have enough room for all their positions to move without a margin call. Once they’ve got the right leverage for that, they focus on taking the exact lot size recommended per position in line with their risk management.
Important Tips To Keep in Mind When Choosing Leverage
- All brokers don’t offer the same leverage. A quick search on broker review sites will show you that most brokers have different leverage limits. While some EU and American brokers only offer 1:30 or max 1:200, others in the AU or other offshore jurisdictions may offer up to 1:2000.
- Leverage doesn’t affect a broker’s reputation. Some traders erroneously believe that brokers offering high leverage are less trustworthy than those offering smaller leverage. That’s not always the case. Brokers that offer small leverage are only domiciled in countries with stricter controls on trading activities. Those offering high leverage may have lax regulations but still offer a good trading experience.
- Some brokers only allow leverage change under certain conditions. With some brokers, you can only change your leverage after closing all your positions. The frequency and ease of change also vary. While some allow you to change the leverage from your account dashboard anytime you want, some others only allow you to change your leverage a maximum of once a month and via email.
- Your leverage will be automatically adjusted as your account size grows. You can’t have the same leverage at all times with most high leverage brokers. Most of them automatically peg leverage at 1:100 for all accounts with equity above $100,000 and may drop it to 1:30 or less when the account equity grows to seven-digit sums.
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Conclusion
The best leverage for small accounts is one that allows you enough wiggle room for trade entries in line with your trading strategy and risk management. You don’t want to choose restrictive leverage that won’t allow you to take all the opportunities presented by your strategy.
If you’re still struggling with trading discipline, it’s best to calculate how much leverage you need to maintain safe risk management.
If you don’t have any issues staying disciplined and only risking 1-2% per trade (or any risk settings recommended by your strategy), it doesn’t matter if you choose 1:500 leverage or 1:2000.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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