Leverage is a tool that allows traders to open positions larger than their actual capital by borrowing money from the broker. In other words, it enables you to control a large financial position using a relatively small amount.
**Illustrative example:**
If you have $1,000 in your account and used a leverage of 1:10, you can open a position worth $10,000
If the price rises by 1%, your profit will be $100
(1% of 10,000) instead of $10 (1% of 1,000)
**Common types of leverage**
1. 1:2 (Doubling the capital twice)
2. 1:10 (Doubling the capital 10 times)
3. 1:50 (Doubling the capital 50 times)
4. 1:100 or more (used in Contracts for Difference)
**Advantages of leverage**
✅ **Increase potential profits**
(With small moves in the market).
✅ **Ability to trade with limited capital**.
✅ **Greater trading opportunities in different markets**.
**Disadvantages of leverage**
**Increase potential losses**
(Losses double at the same rate as profits).
**Risk of 'Margin Call'** where the broker may close your position if your losses exceed a certain limit.
**Exposure to sharp market fluctuations, especially in cryptocurrencies and highly volatile markets.
**Tips for using leverage wisely**
1. **Do not use high leverage at the beginning**
(Start with 1:5 or 1:10 until you gain experience).
2. **Use Stop Loss orders**
To avoid large losses.
3. **Do not risk more than 1-2% of your capital in a single trade**
4. **Understand the broker's policy on margin and leverage before trading**
**Summary**
Leverage is a double-edged sword; it can enhance your profits or double your losses. Therefore, it should be used cautiously and with sufficient knowledge of risk management.
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