25/09/2021

The Basics of Leverage Trading

A lot of brokers offer their clients a leverage facility to increase their trading capital value. To increase the exposure to the markets, leverage is like borrowing funds from the broker. As the potential for rewards increases leverage, it also increases the risk. Through margin trading, brokerage accounts let the clients use leverage.

For CFD traders, leverage trading is powerful as it helps the investors to maximize returns even if the change in prices is small. It also allows exponential growth in their capital and increases their exposure to desired markets. But with these advantages, leverage can also work against the client. Using leverage trading means the trader is placing a small account but having a chance to control a larger trade position in the market. The small amount is called the “margin”. Depending on the regulatory conditions that it follows in terms of offering trading services, the amount of leverage a broker offer varies.

The trader only requires to invest a certain percentage of the whole position when it comes to leverage trading. The percentage varies depending on the amount of leverage the broker offers, the amount of leverage the trader would like to execute and the regulatory authorities that are involved in supervising the online trading industry that it belongs to.

 

Leveraged trading is also used by the traders depending on the level of their experience, risk appetite, investing goals as well as the underlying market they are trading in. Typically, professional traders tend to use leverage more aggressively. Beginner or less experienced traders are suggested to use leverage with caution. In addition, minimum level of leverage as much as possible is used by conservative traders while traders with high-risk appetite use it flexibly.

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The number of leverage traders can use also depends on the type of market. Volatile markets such as bitcoin should be traded with minimal leverage while less volatile assets that do not post wide price fluctuations such as the EURCHF currency pair can be traded with higher leverage.

The value of the position in relation to the investment amount that is needed is represented by the leverage ratio. AvaTrade offers forex traders to trade with up to 400:1 leverage. However, this is also varies depending on the asset class that is trading and the jurisdiction.

Example:

Leverage of 400:1 can control a trade position of $100,000 in the market with only $250. In this, a 1% positive change in price in the market can produce a profit of $1,000 since it is the 1% of $100,000.  If there is no leverage, this 1% positive price movement will only produce $2.5 (1% of $250). Shortly, leverage of 400:1 means that trade positions and its profits/losses are multiplied 400 times. Because of this, leverage is also quoted as a “double-edged sword”. Leverage trading magnified profits but losses are magnified too.

Trading in high leverage means it is easier to lose more than the capital but AvaTrade offers guaranteed negative balance protection. This means that the trader cannot lose more than what is in his trading account balance. It also offers free practice on paper trading account before investing real money. There is also a trading calculator that is used to estimate the possible outcomes of a trade before starting it.



The number of leverage traders can use also depends on the type of market. Volatile markets such as bitcoin should be traded with minimal leverage while less volatile assets that do not post wide price fluctuations such as the EURCHF currency pair can be traded with higher leverage.

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The number of leverage traders can use also depends on the type of market. Volatile markets such as bitcoin should be traded with minimal leverage while less volatile assets that do not post wide price fluctuations such as the EURCHF currency pair can be traded with higher leverage.

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jack

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