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Why Leverage is a double edged sword? P1
When a Forex broker (a brokerage firm) is chosen, many people try to determine the best by looking at what the company offers. Some look at the available currency pairs, while others may consider the terms of withdrawal and deposit, but the vast majority, if not all traders, will look at the leverage that the company provides before making the final decision. Well no need to be surprised! Leverage is a very powerful tool in the hands of traders, and it is a method that allows them to make some big profits for themselves, if they can trade successfully. But many forget that it is a very dangerous tool, especially when new traders use it. This may be the reason why the European Union has decided to regulate leverage, not large leverage, no offers of deposit, and if it happens it is sometimes impossible conditions .. But why is all this interest in leverage? It is time for an answer ... let's delve into the discussion of the importance, importance and seriousness of leverage.
What is leverage?
The concept of leverage is simple - when you start trading, you can borrow and invest some money from a person or institution. The money you borrow and invest is leverage. Now, when you get a return on investment, you will be able to repay the debt, right? This is just a simple example of the concept of leverage, which is similar to some with the loan, but it is not really a loan because you do not receive the money financially, but rather the broker lends you within your account records and with certain conditions and restrictions. So leverage is the power and purchasing power of trading to weaken your capital without having to have these double folds and ultimately you can get their profit as if you had this real money! Be careful .. this is only the bright side, as leverage has significant risks that could lead to the loss of your basic capital in full (we will mention that later).
When you look at forex brokers ads, you often see this number 1: 100. This is a percentage of leverage ratios and this means that you will be able to get $ 100 on every dollar you invest. The number varies from broker to broker, but in general, the higher the leverage ratio, the more purchasing power you can get. For example, leverage 1: 400 means that you will be able to get $ 400 for every dollar you invest, and so on. In this way, professional traders with access to high leverage options (1: 100, 1: 200, 1: 400) are able to double their profits significantly. When a professional trader conducts a trading he trusts very (due to his high experience in trading), a professional trader trades by weakening his capital and earning a lot of profits ... At the end of the deal, the leverage returns to the broker and the trader takes the profit resulting from the large capital.
In the next part, we will talk about leverage numbers.
