What is Leverage Trading?

Leverage trading, also known as margin trading, is a system which allows the trader to open positions much larger than his own capital. The trader needs only to invest a certain percentage of the position, which is affected by many factors and changes between instruments, brokers and platforms. Leverage trading is popular amongst traders and brokers, and is a common trading system nowadays. “Leverage” usually refers to the ratio between the position value and the investment needed, and “Margin” is the percentage of the position needed.

  • WHY TRADE WITH LEVERAGE?

There are several advantages to trading with leverage, so much that is has become a common tool in the trading world.

Minimizes the capital the trader has to invest. Instead of paying the full price for an instrument, the trader can pay only a small portion of it. for instance – if a position’s value at the time of opening is $3,000; instead of paying the full amount, he can employ leverage of 400:1 – meaning for every $400 in actual value he will be requested to invest $1 of his own capital. This mean that for this position he will need $7.5 to open it.

treading leveraqe

Some instruments are relatively cheap, meaning almost every trader can trade them easily. However, some are considered more prestigious and based on their traded frequency and other factors are more expensive. Instead of investing large amounts in order to take part in their market, one can use leverage and enjoy the fluctuations in the price of those prestigious instruments.

While leverage trading, or margin trading, has less capital involved which can be a major advantage for many traders, it also comes with a loss risk. As one can gain much more than his initial investment, losses can occur on the same scale. It is important to keep track of opened positions, and apply stop loss and other market orders in order to prevent large scale losses.