Leverage Definition

Leverage is a very important subject in trading financial markets. Recently it’s also become a very controversial one too. It’s considered to be a double-edged sword. This is because while it can be a very useful tool, at the same time, it can cause devastating effects.

Leverage is provided by a broker, it’s depicted as a ratio such as 1:100. The Leverage provided by your broker allows you to enter positions larger than what your deposit would allow. If you deposit $100, with a leverage of 1:100 you can enter a position of 10,000 USD/JPY. The $100 balance you have will be used as margin to maintain the position, therefore it’s blocked and can’t be used to open other positions that require margin as well. It can be simply interpreted as a multiplication factor, 1:100 leverage will multiply your buying power by 100 times. But the bigger your position, the faster you can burn your account. Especially when your deposit is quite small and uses a lot of leverage. Significant losses can occur quite fast.

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