Explain financial leverage and how to use it properly
Hello. I know that if you use leverage you can earn more for the same trade. But how does it exactly work? Why is it possible to earn more when doing leveraged trading? Thanks guys in advance.
Hello. I know that if you use leverage you can earn more for the same trade. But how does it exactly work? Why is it possible to earn more when doing leveraged trading? Thanks guys in advance.
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To understand what the financial leverage mechanism is, it is worthwhile to first look at a simpler example. It seems that each of us knows exactly what a leverage mechanism is. Leverages understood according to classical mechanics are, for example, found in scissors or an equivalent swing. They serve the purpose of achieving a good result with little effort.
In the case of scissors, the mechanism of the lever consists in the fact that by a seemingly gentle movement of the fingers, we cut through cardboard, paper, wood, etc. In case of an equivalent swing, it is enough for one person to sit or even press on one of the swing seats so that the other user can rise up, above the ground - as if he were completely weightless.
A similar application as in classical mechanics, the lever has gained in the field of finance. Thanks to this tool it is possible to achieve considerable financial results using a small investment capital. This is because the financial leverage will "raise" or "invent" our potential - as if we really had enormous financial strength.
To put it as simply as possible, financial leverage allows us to achieve such a return on investment as if we had invested, for example, 100,000 USD, while in fact our capital was 1,000 USD. The real "strength" would therefore in this case be a hundred times greater than the "strength" felt by the market. Such leverage would have a potential of 1:100.
To understand what the financial leverage mechanism is, it is worthwhile to first look at a simpler example. It seems that each of us knows exactly what a leverage mechanism is. Leverages understood according to classical mechanics are, for example, found in scissors or an equivalent swing. They serve the purpose of achieving a good result with little effort.
In the case of scissors, the mechanism of the lever consists in the fact that by a seemingly gentle movement of the fingers, we cut through cardboard, paper, wood, etc. In case of an equivalent swing, it is enough for one person to sit or even press on one of the swing seats so that the other user can rise up, above the ground - as if he were completely weightless.
A similar application as in classical mechanics, the lever has gained in the field of finance. Thanks to this tool it is possible to achieve considerable financial results using a small investment capital. This is because the financial leverage will "raise" or "invent" our potential - as if we really had enormous financial strength.
To put it as simply as possible, financial leverage allows us to achieve such a return on investment as if we had invested, for example, 100,000 USD, while in fact our capital was 1,000 USD. The real "strength" would therefore in this case be a hundred times greater than the "strength" felt by the market. Such leverage would have a potential of 1:100.

Using financial leverage, we can expect to achieve high profits with a low financial investment of our own. However, when we want to use this type of transactions, we need to know that they are, however, a big risk, because the exchange rate changes very rapidly, and even a small change can cause a sudden drop, and thus the loss of our investments.
Using financial leverage, we can expect to achieve high profits with a low financial investment of our own. However, when we want to use this type of transactions, we need to know that they are, however, a big risk, because the exchange rate changes very rapidly, and even a small change can cause a sudden drop, and thus the loss of our investments.

Leverage is used when investing in financial markets, mainly forex. It multiplies the capital invested. This allows investors who do not have much capital to invest effectively, also those who like riskier investments can implement that strategies.
On such platforms you can usually choose the leverage for your account. In some countries you can find leverage even as high as 2000:1.
How does leverage work? It multiplies the available capital. For example, with a leverage of 30:1, each USD on your account has a purchasing power of 30 USD This means that by investing 10.000 USD you can make investments that would normally cost 300.000 USD.
In practice it looks like this:
The investor wants to open a Buy trade on the currency pair EURUSD in the size of 0.2 lot. The size of this contract is 20000 euros. If he did not use any leverage, he would have to invest this amount, in the case of a leverage of 1:10 the amount necessary for the investment is only 2000 euro, while in the case of a leverage of 1:30 it is only 667 euro. And if one uses a leverage of 1:100, then only 200 euros are needed to open such an investment.
Assuming that the opening price was 1.0978 and the closing price was 1.11 then such an investment will yield a profit of about 222 euros, regardless of the leverage used. However, since in the case of a leverage of 1:10 the margin is equal to 2000 euro, the profit is about 10%, while in the case of a leverage of 1:30 the margin is equal to 668 euro, so here the profit is about 30%.
Due to the fact that the leverage allows opening larger positions with less capital, the profits can be higher. At the same time it should be remembered that it is a double-edged sword - not only profits but also losses are bigger.
Leverage is used when investing in financial markets, mainly forex. It multiplies the capital invested. This allows investors who do not have much capital to invest effectively, also those who like riskier investments can implement that strategies.
On such platforms you can usually choose the leverage for your account. In some countries you can find leverage even as high as 2000:1.
How does leverage work? It multiplies the available capital. For example, with a leverage of 30:1, each USD on your account has a purchasing power of 30 USD This means that by investing 10.000 USD you can make investments that would normally cost 300.000 USD.
In practice it looks like this:
The investor wants to open a Buy trade on the currency pair EURUSD in the size of 0.2 lot. The size of this contract is 20000 euros. If he did not use any leverage, he would have to invest this amount, in the case of a leverage of 1:10 the amount necessary for the investment is only 2000 euro, while in the case of a leverage of 1:30 it is only 667 euro. And if one uses a leverage of 1:100, then only 200 euros are needed to open such an investment.
Assuming that the opening price was 1.0978 and the closing price was 1.11 then such an investment will yield a profit of about 222 euros, regardless of the leverage used. However, since in the case of a leverage of 1:10 the margin is equal to 2000 euro, the profit is about 10%, while in the case of a leverage of 1:30 the margin is equal to 668 euro, so here the profit is about 30%.
Due to the fact that the leverage allows opening larger positions with less capital, the profits can be higher. At the same time it should be remembered that it is a double-edged sword - not only profits but also losses are bigger.

Financial leverage is the use of borrowed funds to increase the potential return on an investment. When you use leverage in trading, you are essentially borrowing money from your broker to increase the size of your position. This means that you can control a larger position in the market with a smaller amount of your own capital. For example, if you have $1,000 and your broker offers 1:10 leverage, you can now control a position worth $10,000. If the value of the asset increases by 1%, you would earn $100 on your $1,000 investment, resulting in a 10% return on your initial capital. However, it is important to note that while leverage can magnify your profits, it can also magnify your losses. If the value of the asset decreases by 1%, you would lose $100 on your $1,000 investment, resulting in a 10% loss on your initial capital. In order to use leverage properly, it is crucial to have a solid understanding of risk management and to only use leverage when you are confident in your trading strategy. It is also important to set stop-loss orders to limit your potential losses and to avoid over-leveraging your positions.
Financial leverage is the use of borrowed funds to increase the potential return on an investment. When you use leverage in trading, you are essentially borrowing money from your broker to increase the size of your position. This means that you can control a larger position in the market with a smaller amount of your own capital. For example, if you have $1,000 and your broker offers 1:10 leverage, you can now control a position worth $10,000. If the value of the asset increases by 1%, you would earn $100 on your $1,000 investment, resulting in a 10% return on your initial capital. However, it is important to note that while leverage can magnify your profits, it can also magnify your losses. If the value of the asset decreases by 1%, you would lose $100 on your $1,000 investment, resulting in a 10% loss on your initial capital. In order to use leverage properly, it is crucial to have a solid understanding of risk management and to only use leverage when you are confident in your trading strategy. It is also important to set stop-loss orders to limit your potential losses and to avoid over-leveraging your positions.