What is leverage can I trade without it? Leverage means “borrowing” money to invest or purchase something, simply put giving you a higher buying power.
In this article, I will explain why forex leverage is important and how we can make a better use of it. Let’s say you want to buy a house but don’t have enough money.
Common sense is to go to the bank and ask for a loan. Bank will give you the loan to buy the house but you’ll be required to have 25% of the total value. Assuming the house costs $350,000 you need to have $87,500 what means is that the bank is leveraging your buying power of 3:1.
Leverage in forex is similar, to trade on a standard lot you need $100,000 so brokers are loaning you money to open that volume.
Leverage drop after regulations
I will break down for you the calculation formula for forex: number of lots X $100,000 divided by leverage. Let’s assume we have $1000 balance in our account and we want to open 1 lot with a leverage of 50:1. Applying the formula 1lot X 100,000 / 50 leverage = $2000 so not enough balance to control a lot. How about a mini lot: 0,1lot X 100,000 / 50 leverage = $200, now you can control one mini lot. The leverage of 50 used to be the recommended one up to the new MiFID 2 by ESMA. We love margin trading and higher leverage but very few benefit from it. In a perfect world, traders will choose leverage over risk but there is a risk in everything we do.ESMA and MiFID 2
The European Securities Market Authority (ESMA) if you're familiar with the entity, they dropped the leverage on us. Welcome to the US leverage! After so many years of high leverage in the Eurozone, the Government regulators decided to drop the leverage. In fact, it dropped out below the US leverage. But on a serious note, I will like to talk in this article that is not the end of the trading world.
We will walk thru a simple example of how to calculate leverage and making it your useful tool. Using this example can make you achieve a proper risk management. You will understand how much money you need to open certain trades.
Not only that the risk achieved is the proper risk but in some cases, traders tend to go beyond that. If you’re one of those traders I’m sure you know what I’m talking about: higher risk – higher rewards. Whit a leverage of 30:1 or 20:1 you can still open trades and riskless. One very important aspect that 70% of traders missed out is higher balance = lesser risk.
The new leverage standards

Stop loss ratios and percentage in risk
Starting off from $432.3 to control 1 mini lot, let’s assume you have a 20 pip stop loss, which is a common stop loss used by many traders. Back to 1 mini lot and a 20 pip stop loss will look like a dollar per pip 20 pips x $1 = $20 loss if using the 2:1 reward-risk ratio. Where 2 is the take profit and 1 is the stop loss, $40 profit and $20 loss. What is $20 in percentage basis from your $1000 account balance? $1000 X 2% = $20. You can get to 2% risk very comfortably. Think about this for a second $432.3 I wouldn’t recommend but if you multiply that by two $432.3 X 2 = $864.6 controlling 2 mini lots. Risk-wise using the same ratio 2:1 we are risking 4% = $40 loss and $80 profits. You can even go higher with 1 mini lot and a 50 pip stop loss that’s 5% risk and if you have 100 pip stop loss that’s 10% risk.Not all Brokers are evil
Since begging on modern trading allot of retail traders lost money with unregulated brokers or investment firms. I’m afraid this will continue to happen however you have the power to avoid being scammed. Probably you’re asking why I’m mentioning scams when we’re talking about leverage right? Well, allow me to explain: This was the intention of ESMA from the beginning, make it harder for unregulated brokers to land their services.