Leverage
Leverage lets you trade a size larger than your account. Profit grows, and so does loss.
Leverage — what it is?
Leverage is borrowed funds from the broker that let you open a position larger than your own money. 1:100 leverage means a thousand dollars can open a hundred-thousand-dollar position.
Leverage doesn't increase risk by itself. It increases the volume available to you, and risk is what you set with your stop and your position size.
The danger is elsewhere: high leverage removes a natural limit. Without it, making a big mistake is physically impossible; with it, it's easy, and a single trade can close the account.
Leverage — how it is built?
The reference point is simple: if a triggered stop costs you more than one or two percent of the deposit, the volume is wrong — no matter what leverage the broker gave you.
Leverage — common mistakes
Treating leverage as a tool for accelerating profit. It accelerates losses at exactly the same rate.
Opening a position on "all the leverage". With a position like that you don't need a stop: the margin call will do its job.
Not knowing your broker's stop-out level.
Using high leverage on crypto, where the daily range is already measured in percent.
Related to
Glossary
- open
- the first price of the period.
- position
- an open trade.
- volume
- the number of trades or contracts in a period.
- position size
- the size calculated so that the stop being hit costs a set percentage of the account.
- high
- the highest price of the period.
- close
- the last price of the period. Considered the most important of the four: breakouts are confirmed by the close.