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How to Pick the Right Leverage Level
There are widely accepted rules that investors should review before selecting a leverage level. The easiest three rules of leverage are:
- Maintain low levels of leverage.
- Use trailing stops to reduce downside and protect capital.
- Limit capital to 1% to 2% of total trading capital on each position taken.
Forex traders should choose the level of leverage that makes them most comfortable. If you are conservative and don’t like taking many risks, or if you’re still learning how to trade currencies, a lower level of leverage like 5:1 or 10:1 might be more appropriate. (For more read The Basics of Forex Leveraging.)
Trailing or limit stops provide investors with a reliable way to reduce their losses when a trade goes in the wrong direction. By using limit stops, investors can ensure that they can continue to learn how to trade currencies but limit potential losses if a trade fails. These stops are also important because they help reduce the emotion of trading and allow individuals to pull themselves away from their trading desks without emotion. (For more on protective stops, read The Stop-Loss Order - Make Sure You Use It.)
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