Trading leverage, also known as financial leverage, refers to using borrowed capital to increase the return of an investment. It allows traders to open positions larger than their actual account balance, potentially increasing your profits but also significantly increasing your risks.
How it works: When you use leverage, you only need to put down a fraction of the total trade value, known as the margin. The rest is effectively borrowed from the broker.
Example: If you have a leverage ratio of 100:1, it means for every $1 you invest, you can control $100 in the market. So, with $1,000 in your account, you can trade up to $100,000 worth of assets.
Potential Gains and Losses: Trading leverage amplifies both potential profits and potential losses. For instance, if the value of the asset increases by 1%, with 100:1 leverage, your profit would be 100%. On the other hand, if the asset value decreases by 1%, your loss would also be 100%.
Risk: Higher trading leverage means higher risk. Small market movements can have a significant impact on your account balance. It's essential to manage your risk carefully when trading with leverage.
Margin Call: If the market moves against your position, the broker may issue a margin call, requiring you to deposit more funds to maintain your position. If you fail to do so, the broker might close your position to prevent further losses.