> Leverage

Leverage

In terms of trading, leverage can be characterized as a loan, supplied by a broker, which allows a trader to be able to control a relatively large amount of money with a significantly lesser initial investment. As such, leverage effectively allows traders to make a much higher return on investment compared to trading without any leverage. Traders use leverage to make a profit from smaller movements in certain assets, such as stocks and foreign exchange.Given such small movements in these instruments at times, trading without any leverage could potentially diminish profits. As a result, traders routinely rely on leverage to make financial trading viable. As a rule of thumb, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The most common market where leverage is utilized is in the forex market, as most currency fluctuations are relatively tiny and encompass fractions of units. How to Trade with LeverageThere is also a lot of variation with trading leverage in each account, which can often vary from 1:50 to 1:200 on most forex brokers. However, many brokers can offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. As an example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. By extension, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. Using leverage, the potential for profit is clear to see. However, leverage also opens up the possibility of losing a much greater amount of their capital. If the value of the asset turned against the trader, they could have lost their entire investment and more.

As such, leverage effectively allows traders to make a much higher return on investment compared to trading without any leverage.

Traders use leverage to make a profit from smaller movements in certain assets, such as stocks and foreign exchange.

Given such small movements in these instruments at times, trading without any leverage could potentially diminish profits.

As a result, traders routinely rely on leverage to make financial trading viable.

As a rule of thumb, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers.

The most common market where leverage is utilized is in the forex market, as most currency fluctuations are relatively tiny and encompass fractions of units.

How to Trade with Leverage

There is also a lot of variation with trading leverage in each account, which can often vary from 1:50 to 1:200 on most forex brokers.

However, many brokers can offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency.

As an example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars.

By extension, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker.

Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000.

Using leverage, the potential for profit is clear to see. However, leverage also opens up the possibility of losing a much greater amount of their capital.

If the value of the asset turned against the trader, they could have lost their entire investment and more.