What is Leverage?
Having a clear understanding of leverage and how it can work to either your advantage or disadvantage is absolutely essential.
Trading using leverage means buying on margin to enhance return on value without increasing investment. This means only a relatively small amount of money is required to enter a buy or sell position.
Trading Foreign Currency Example:
100:1 Leverage
USD/JPY is trading at (sell/buy) 109.47/109.50. You believe that the USD is trending downward, so you will sell the pair at 109.47.
Opening Position:
Closing Position with a Profit:
After two days the USD/JPY buy price decreases 100 pips to 108.47/108.50 at which point you decide to buy the currency pair back.
Closing Position with a Loss:
If the buy price had moved in the opposite direction you would have realized a gross loss.
Trading using leverage means buying on margin to enhance return on value without increasing investment. This means only a relatively small amount of money is required to enter a buy or sell position.
Trading Foreign Currency Example:
100:1 Leverage
USD/JPY is trading at (sell/buy) 109.47/109.50. You believe that the USD is trending downward, so you will sell the pair at 109.47.
Opening Position:
Closing Position with a Profit:
After two days the USD/JPY buy price decreases 100 pips to 108.47/108.50 at which point you decide to buy the currency pair back.
Closing Position with a Loss:
If the buy price had moved in the opposite direction you would have realized a gross loss.