What is leverage and how does it work in trading?

What is leverage and how does it work in trading?

The concept of “leverage” includes a special system in the Forex market, thanks to which the trader manages to conclude transactions significantly exceeding the trader’s private financial asset. Often, leverage is provided by the broker with whom the trader works. The bonus of working with leverage is that when concluding a financial transaction, a trader invests a small percentage of personal funds. Naturally, the level of leverage is due to many factors: from the broker's interest rate to the speculative asset.


In other words, leverage is an example of margin trading, which is in great demand in the modern market. Under the margin refers to the ratio of the capital of the trader to the invested amount, which is expressed as a percentage.


What are the benefits of leverage trading?


There are many factors that indicate that leverage is a rational offer, especially if you are a beginner and do not have large capital. Leverage is rational due to the following aspects:


  • An expanded range of tools for trading. The use of most trading instruments is possible only with a large start-up capital. With the help of leverage, you can start the game with a difference in rates, earn start-up capital, and then enter the market of valuable assets that is not available to beginners.


  • The minimum amount of starting capital to start trading. If you do not have the necessary amount in order to conclude a deal, then the leverage will help you. To better understand: if you need to have $ 3,000 available to open a transaction, then using a leverage of 1: 400, you will need to invest only $ 7.5 out of your personal pocket.


  • The ability of a trader to manage stop signals. Starting to trade with leverage, you gain the opportunity to both earn big capital and lose it. The basis of trading is self-control, if the trader is not able to complete the transaction on time, there is a risk of flying into significant losses.


Leverage is nothing more than an auxiliary tool for Forex trading. Many brokers immediately provide a fixed limit when registering on their website. If you are a beginner trader, we do not recommend starting a trade of this type. First, you need to develop your own trading strategy, understand all the intricacies of the foreign exchange market, and only then start working with margin trading.


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