Leverage goes by many different names. It is broker’s leverage, leverage, leverage, or simply credit. What is leverage and how to use it. What advantages does a trader get if he uses leverage? Are there any pitfalls in using leverage that you may not know about? Leverage is a loan of money that a trader receives from a brokerage company. With more funds, including leverage money, the trader is able to trade larger amounts and make potentially larger profits.
It is possible to get such a loan only if you have a primary deposit account with a broker. Leverage can be several times higher than the amount of the trader’s deposit. The size of leverage can be different. The ratio of deposit to broker’s leverage can be 1:10, 1:20, 1:50… It means that using leverage a trader can trade volumes 10, 20, 50 times higher than the deposit. Most often it is suggested to take leverage in the ratio of 1:100. The leverage calculation is as follows. Suppose a trader has a deposit of $ 1000. Getting a deposit of 1:10, the trader operates on the market with the sum of $ 1000*10= $ 10 thousand.
Getting leverage from a brokerage company, a trader does not pay any credit interest. And the borrowed funds go to the trader’s deposit. If the trader trades with a loss, the funds on his deposit are reduced. In case of critical reduction of the deposit by 20-30-50 per cent, the deal is closed forcibly. If a trader wants to postpone his deal to the next day, in this case the brokerage company withdraws interest (swap) in the amount of the loan and deposit rates.
Pros and cons of leverage
One of the main advantages of leverage is that you can get high profits on successful trades. The second advantage is the possibility to multiply your deposit capital in a fairly short time. Getting a credit, a trader trades with volumes exceeding his deposit. There are also minuses of using credit funds. Since high profitability in Forex trading is associated with high risks. Besides, often, receiving a large amount of money as credit funds, a trader can become disoriented and consider the credit as real money. As a result, the rules of capital management are not observed, and a novice trader takes into account only the size of the deal.
How to use leverage
Credit is an excellent tool for capital formation. But you need to know how to use it. First of all, you should calculate trades taking into account your own deposit, excluding credit funds. It is best for beginners to start trading with small borrowed amounts.
In one transaction it is recommended to invest no more than 1-2 per cent of the deposit amount. And there is one more important condition – do not forget about stop losses, which limit the loss. Stop-loss is a trading order, which fixes the financial result of trading when the designated level is reached. The size of the stop loss is determined before opening a deal or after.P.S. Leverage is a good tool for profit, if this tool is used wisely.