Leverage means using capital borrowed from a broker when opening a position. Sometimes traders may wish to apply leverage in order to gain more exposure with minimal equity, as part of their investment strategy. Leverage is applied in multiples of the capital invested by the trader, for example 2x, 5x, or higher, and the broker lends this sum of money to the trader at the fixed ratio. Leverage may be applied to both buy (long) and short (sell) positions. It is important to note that any losses will be multiplied as well as profits. – as explained on eToro.
Leverage allows you to trade with more resources than you have, thus increasing the potential profits without the need to deposit super large sums. Basically, it is the level of risk that you can choose for each trade. Maximum leverage in the US is 1:50, in Europe 1:200. Anything above 1:200 is considered too risky.
Easy example, if you invest $1,000 without using any leverage, and the stock, as well as the currency, would be inclined to your prediction, and you get 10% profit so you only get $100. But using the leverage 1:100 (X100 you might see it instead on the broker’s site) your profit will be $10,000.
The average daily currency rate changes are 1% – 3% so if you opened a position without the use of leverage, it would take quite a long time to double your money. With the help of leverage, you can achieve the desired results up to 200 times faster.
As mentioned, using leverage is risky; therefore use it with caution.
For more information,
You Might Need To Know How Does Leveraging Work.
● Choose the asset you are interested in trading on the eToro platform and click TRADE. A popup window with the trade parameters will appear, as illustrated below.
● Select the appropriate tab at the top for Sell (short) or Buy (long) for your trade.
● Set the amount of capital you wish to invest in this trade. Set your leverage multiplier. This ratio differs depending upon the individual asset. Alternatively, you can also trade without using leverage by choosing 1x.
● Set your Stop Loss and Take Profit parameters. A Stop Loss limitation is required in order to mitigate the possible risk to your capital.
● Click SET ORDER to place the trade. Trades are executed immediately when the market is open. Leveraged trades are processed as CFDs.
To minimize the risk using Leverage
While trading with leverage can lead to increased profits on successful trades, it also carries the risk of magnified losses. There are, however, risk-management tools at your disposal on eToro to help reduce potential loss.
Apply a Stop Loss to close a trade in the event that the market moves a specified amount against your position. You can set your Stop Loss according to a specific level in the market (Rate) OR as a monetary amount, also shown as a percentage of your initial investment, in the trade window.
Set a Take Profit order to automatically close your position when profit on your trade hits the amount you choose.
balance protection: Although not required by law, in the rare occasion in which market conditions cause your account’s balance to go negative, eToro will absorb the loss and balance your account back to zero.
Currency rates usually don’t have enormous swings that can generate 100% profits in minutes or hours so trading becomes productive only when, deposits reach a certain limit.
In order to not waste the trader’s time, currencies are traded in minimum packs called lots, just like beers are sold in six-packs.
The standard size of a lot is 100,000units of the base currency. However, there are also smaller types of lots for people who don’t want to risk too much money.
● Mini lot = 10,000 units of base currency
● Micro lot = 1,000 units of base currency
● Nano lot = 100 units of base currency
Moving Up to Mini Lots
Before micro-lots, there were mini lots. A mini lot is 10,000 units of your account funding currency. If you are using a dollar-based account and trading a dollar-based pair, each pip in your trade would be worth about $1.00. If you are a beginner and you want to start trading using mini lots, make sure that you’re well-capitalized.
While $1.00 per pip seems like a small amount, in forex trading, the market can move 100 pips in a day, sometimes even in an hour. If the market is moving against you, that adds up to a $100 loss. It’s up to you to decide your ultimate risk tolerance but to trade a mini account, you should start with at least $2,000 to be comfortable.
Using Standard Lots
A standard lot is a 100,000-unit lot. That is a $100,000 trade if you are trading in dollars. The average pip size for standard lots is $10 per pip. This is better remembered as a $100 loss when you are down just 10 pips. Standard lots are for institutional-sized accounts. That means you should have $25,000 or more to make trades with standard lots.
What is Margin?
A margin is the relative amount needed to carry out a leveraged deal, taking into account spreads, leveraging, and currency conversions. Let’s say you want to invest $1,000 in Apple stock at a leverage ratio of 1:10. The margin will be 10%, meaning you will need to invest $100. If the current stock price for Apple is $136, you will receive the equivalent 7.35 Apple shares.