Leverage
What is leverage?
Trading leverage (margin trading) - is the ratio of the possible credit, which is provided by the company to the trader/client against its own funds (margin).
What is the essence of leverage?
Standard lot on is 100 thousand units of currency. That is, simply put, buying 1 lot in the euro/dollar pair, the trader buys 100 thousand euros. Naturally, not everyone has such financial possibilities. The usage of leverage allows borrowing money from a broker and trading larger amounts than the trader has on his/her deposit. In its turn it gives a chance to get considerable profit or noticeable loss if the price moves against the opened position.
Brokers offer leverage of 1:20, 1:50, 1:100 or 1:500, and some even 1:1000.
For example, a leverage of 1:100 means that you would need a hundred times less to buy or sell 10,000 units of the base currency - only 100 points of the base currency. Such an amount is called margin (from the English margin - the collateral) and in the base currency is calculated by the formula.
How does leverage affect trading on ?
The use of big leverage gives an opportunity, having small funds on the deposit, to open big positions by volume (lot), no more than that. That is, having $1000 on your account, the leverage of 1:100 will give you a total deposit of $100,000, while 1:500 - $500,000. П\
If the rules are used competently manimangement and risk management, whether the leverage is 1:100 or 1:500 - it doesn't change the essence of the matter. However, when it is important to have a reserve of free funds according to the strategy, high leverage gives more opportunities.
When trading on margin, it is important to understand and correctly correlate the size of the deposit to the volume of the transaction to be opened.
Read more about leverage at
- Leverage and trading risks: does size matter?
- Large leverage vs. small leverage
- Leverage 1:500 - the limit of an honest broker?