Leverage trading is an investment strategy which takes advantage of the use of borrowed capital to increase potential returns. It is commonly used in financial markets to give traders and investors the ability to trade with more capital than they actually have, thus increasing the potential of making larger returns.
The concept of leveraging works by allowing traders to take on loans or ‘borrowed’ money to increase their overall investment capital. For example, if a trader has $1,000 in their trading account, through leveraged trading this can be increased to $10,000. The trader then has the use of the increased capital to make much larger investments, with the possibility of greater returns.
The leverage ratio is generally determined by the broker a trader uses. Leverage ratios typically range from 1:1 all the way up to 1:500. For example, a leverage ratio of 1:200 means that for every $1 deposited a trader has access to $200 worth of capital.
Leveraged trading is often attractive to traders who are looking for higher profits, but should be considered cautiously due to the inherent risks. One of the major risks with leveraged trading is that while potential returns may be substantial, so too is the potential for losses. This is because when a leveraged position is opened, the associated margin requirement can be quickly eroded if the market moves against the trader’s position. As such, leveraged trading should only be considered by traders who can afford to shoulder the risk associated with it.
Overall, leverage trading can give traders and investors the ability to increase their return potential. However, it is important to understand the associated risks and to ensure that leverage is used responsibly.
