What is Leverage?

What is Leverage?

The textbook definition of “leverage” is having the ability to control a large amount of money using none – or very little – of your own money, and borrowing the rest.

 

For example, to control a $100,000 position, the broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1

 

Learn About Leverage

For traders to aim for any decent returns, leverage is used to magnify these small price movements. Leverage is defined as the ratio of the amount of capital used in a transaction to the required margin. In other words, leverage gives you the ability to control much larger dollar amounts in a trade with only a relatively small deposit (your margin). For example, if the EUR/USD rate moves up 100 pips from 1.1305 to 1.1405 and you had invested $1000, you would have made $10 on that trade.

 

However, by using a leverage of 1:100, every $1 you invest is worth $100, so with your $1000 margin you can open a $100,000 deal. So for this example, your $10 profit is magnified to $1000.

 

Another way to think about leverage is to think of it as a loan. If you have $1000 and take a ‘loan’ that equates to $100 for every one of your dollars, you have $100,000 to trade with. Once your trade has been concluded, you return the ‘loan’ amount and keep the resulting profit.

 

It’s important to note that leverage is often considered a double-edged sword since large price swings on accounts with higher leverage increase the chances of triggering your stop loss. Because of that, most beginner traders might prefer to start off using minimal leverage to get an idea of how to use proper risk management in order to minimize losses. More experienced traders may use higher-leverage accounts to maximize their wins and benefit from that advantages that forex has over other financial markets.

What is Leverage?

The textbook definition of “leverage” is having the ability to control a large amount of money using none – or very little – of your own money, and borrowing the rest.

 

For example, to control a $100,000 position, the broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1.

 

Learn About Leverage

For traders to aim for any decent returns, leverage is used to magnify these small price movements. Leverage is defined as the ratio of the amount of capital used in a transaction to the required margin. In other words, leverage gives you the ability to control much larger dollar amounts in a trade with only a relatively small deposit (your margin). For example, if the EUR/USD rate moves up 100 pips from 1.1305 to 1.1405 and you had invested $1000, you would have made $10 on that trade.

 

However, by using a leverage of 1:100, every $1 you invest is worth $100, so with your $1000 margin you can open a $100,000 deal. So for this example, your $10 profit is magnified to $1000.

 

Another way to think about leverage is to think of it as a loan. If you have $1000 and take a ‘loan’ that equates to $100 for every one of your dollars, you have $100,000 to trade with. Once your trade has been concluded, you return the ‘loan’ amount and keep the resulting profit.
It’s important to note that leverage is often considered a double-edged sword since large price swings on accounts with higher leverage increase the chances of triggering your stop loss. Because of that, most beginner traders might prefer to start off using minimal leverage to get an idea of how to use proper risk management in order to minimize losses. More experienced traders may use higher-leverage accounts to maximize their wins and benefit from that advantages that forex has over other financial markets.

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