What is Leverage Trading?
The term “leverage” is common to everyone: to leverage something is to use power or influence to gain a desired result.
In the forex market, leverage is used to describe debt: a company or firm with more debt than equity is
considered to be highly leveraged, where a firm with more equity than debt is considered the opposite.
More exactly, leverage is defined as the use of various financial instruments or borrowed capital, such as
margin, to increase the potential return of an investment: a tool that allows an individual or company to
increase their market exposure to a point that
exceeds the actual investment.
Leverage trading means borrowing capital from the broker to enter larger trades in order to increase profits on one’s account.
However, sometimes leveraging can be extremely dangerous. This is particularly true for new traders.
Leveraging increases potential risk, and therefore leveraging, while magnifying gains, can lead to much larger losses.
It involves putting down collateral, known as margin, to take on a larger position in a trade.
While this can in theory increase the revenues gained by the trader, it also sets up the trader to take a much
larger loss on the trade if it goes bad.