by In trading on Forex or Stocks either Crypto markets, leverage is the use of borrowed funds or capital to increase the potential return on investment. Essentially, leverage allows traders to magnify their profits and losses by trading with more money than they actually have in their account. This can be beneficial for traders who want to take advantage of small price movements in the market, as it allows them to make larger trades with a smaller amount of capital.
For example, if a trader has $1,000 in their trading account and uses a leverage of 1:100, they can effectively trade with $100,000. This means that if the price of the asset they are trading moves by 1%, they could potentially earn $1,000 (or 100% of their account balance). However, if the price moves against them by the same amount, they could lose their entire account balance.
While leverage can increase potential profits, it also increases risk. It is important for traders to carefully manage their risk and use appropriate leverage levels that are suitable for their trading strategies and risk tolerance. Traders should also be aware of the potential for margin calls, where the broker requires additional funds to cover losses on leveraged trades.
Indeed, need to think about leverage, otherwise losses can be very painful.