I have been trying to choose a broker today to open a demo account with (very confusing process I must say) and don’t understand how they determine what leverage to offer you. On the FXOpen site I read the following, under the section describing what leverage is offered with their micro account:
[I]From 1:1 to 1:500 for Micro accounts under USD 3,000. When the account reaches a balance of US$3000 or more, the leverage will be reduced 100x (for example from 1:500 to 1:5).
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Why do they offer less leverage if your account is over $3000?? High leverage is good right? So why do they reduce it?
Thanks
Leverage is a two way sword - it increase profit and risk level at the same ratio. So it neither good nor bad for trading - it can’t make a strategy profitable. For example - if a strategy can make 10% profit with 1:10 leverage with a risk of 10% loss - it will make 20% profit with a risk of 20% if we take 1:20 leverage.
FxOpen may think low investment is suitable for higher risk and allow high leverage, but for higher investment it may be too risky. You can lose 50% of $100 (i.e $50) but you may not agree to take risk of losing 25% of $1000 because it cost $250.
When you’re a very low funded trader the positions you put on don’t create much of a risk to the broker if they aren’t directly offset by another customer and can’t hedged quickly enough (for example, if you’re scalping). When you get bigger, though, that risk gets more significant.