The concept of leverage is misinterpreted these days. The basic definition of leverage is borrowing money to buy a bigger position. The goal of using leverage is to gain more return on investment. The leverage increases the purchasing power and risk for the investor. Still, questions arise? What is leverage, and is it beneficial? Let’s talk about it Leverage in Forex
What is Leverage?
Leverage is using borrowed money to buy a bigger position. The goal is to increase purchasing power, increase return on investment, and increase profits and funding business operations. The broker provides debṭ to a trader in a brokerage account. Forex traders use leverage to gain profit from small price changes. Thus, leverage amplifies both profits and losses. Leverage trading is not illegal.
A small change in the price of an asset can result in a huge profit. There’s a contract with the provider where you get the price difference in opening and closing positions. Traders only pay a fraction or percentage of transaction value because it permits them to track their profits. Leverage includes options trading, futures contracts and margin purchases. If leverage is used in the right way, it is beneficial for you.
Leverage can start from roughly around 1:30. The ratio represents a huge profit, but the leverage differs based on retail or professional trader. For a professional trader, it can go upto 1:200.
How can you use leverage?
Leverage is the capability to enter a position that is more valuable than your brokerage account. In simple words, You can enter a large position by borrowing money from your broker. Leverage is calculated by using a ratio of your account money to money you can trade.
Benefits of leverage account:
- You can buy more positions with leverage than in a cash account.
- Your capital increase
- The level of profits also increases.
- You can generate a significant amount of profit in a short time.
- You get more exposure to the market.
- It is a solution to low volatility.
- The volatility of the market increases due to leverage which results in more profit
- You can buy a larger position with a limited amount of capital.
- You have to put less effort to get huge profits because there is no limit on the kind of financial instruments you’re trading. So you can invest a small amount of money as an initial deposit to buy larger positions.
- It helps to diversify your portfolio.
- Trader’s capital can be invested and reinvested to generate a huge amount of profit and significant returns quickly.
- The loan you take is interest-free.
- The profits in leverage are more than what you have invested.
Example of leverage
For example, if you have $1000 in your account and you can open a position of $100,000, then your leverage is 1:100(1000/100,000). 100 means you can trade 100 times more than your actual investment. If you trade 3 standard lots in your account, then your leverage is 300 times ($300,000/1000).
Basic leverage amounts:
Leverage is given on a particular amount, and it differs according to the broker. Brokers provide leverage according to their rules and regulations. Some common leverages are 1:50,1:100,1:200,1:400:-
- 1:50:- One-fifty means you can buy a position for 50 dollars from every single dollar in your account.
- 1:100:- One hundred means you can buy a position for 100 dollars from every single dollar in your account.
- 1:200:- One-two hundred means you can buy a position for 200 dollars from every single dollar in your account.
- 1:400:- One-four hundred means you can buy a position for 400 dollars from every single dollar in your account.
What’s the difference between margin & leverage?
The fundamental difference between margin and leverage is margin is:
Margin is an amount used to place a trade, and leverage is the position you get from investing money.
If we want to compare margin and leverage in a formula, then we can say that.
Margin = 1/ leverage or leverage = 1/margin or leverage = 100/ margin percentage
If you know how to use leverage correctly, the benefits are immeasurable. You can use leverage according to the amount of risk you want to take. Leverages can solve the problem of limited profits and low volatility. You don’t have to put much effort and time to gain huge benefits. It is beneficial for traders with a small capital or traders who want to invest huge amounts. Proper knowledge, risk management and emotional control will help you to be successful. Brokers like TradedWell offer flexible leverage. The leverage can range from 1:30 to 1:200, and you can trade at a low cost with phenomenal service.