Financial leverage is a term used to refer to a tool that gives a lot of preference for traders to obtain trading opportunities with larger amounts than the amounts that they actually possess. There are several types of leverage, such as leverage 1:50 and that means that your trading will be using an amount larger than your actual capital amount, multiplied by 50. The same principle applies to leverage of 1:100 and 1:200, respectively.
A simple example is: if someone invests USD 10,000, this means that by using financial leverage, he/she can actually invest and make deals with an amount of USD 1,000,000 and, through this, there will be more trading opportunities and larger profits. It must be noted, however, that financial leverage could increase the risk in trading. This means that whoever possesses a small amount to start with, will imagine that by using financial leverage, he/she will convert his capital to a large amount within a short period of time, and while this is possible, he/she must be careful of the risk involved, if the leverage is not suitable with the amount he/she invested.
Of course it is possible for the leverage to be on your side, as you’re trading using multiples of your original amount. If a trader deposited USD 10,000 with a leverage of 1:100, means he/she is trading using an amount of USD 100,000and will have to recognize this, and manage it properly without increasing the risks that may make him/her lose all of their money. The trader should start by managing the capital with a risk percentage not exceeding 5% of the capital, and will have to use the “stop lose” command, because without stopping the loss, the trader can lose his starting capital in one deal if the price goes against him/her.
So we have to know that financial leverage is a double-edged sword, and you have to use the leverage that is most suitable for your capital amount. It is important that you don’t get too excited by increasing the leverage in order to increase your ability to trade in larger amounts and create larger deals, because as profit could be very big, loss can also be very big. That’s why the leverage is viewed as a double-edged sword, and you are the one who gets to decide if it works for or against you.
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