What is leverage?

What is leverage?

In financial markets such as forex, a broker or agency provides a tool to the traders to trade beyond their available assets and make trades with a higher magnitude, and that tool is leverage.

Pay attention to the example below to understand more about leverage.
Assume you have 1000$ in balance, and the price of one-ounce gold is 1600$. You cannot buy an ounce of gold with your available credit. With the help of leverage, brokers can allow you to purchase gold ounces, much more than your account balance. For example, when a trader uses 1000 leverage, they will have 1000 times their assets, that is 1,000,000$, which the broker has lent to them. Now this trader can buy as many ounces of gold as they desire with the funds provided by the broker. So they can earn an adequate profit. As such, you can earn a good profit, but note that the trader is not allowed to lose more than their initial balance, that is 1000$. If they lose 1000$, the broker will take back the loaned funds. 

Therefore, high leverage can bring a good profit for traders. Whereas,if they buy a large magnitude, they will increase the trade's risk and disregard asset management. Although the trader can earn more profit, there's the possibility of losing their assets very quickly.

Leverage in brokers

As mentioned, Leverage is a loan or borrowed funds that brokers give to traders so they can make trades beyond their assets. Brokers usually offer different ratios for leverage, and this depends on your broker.
Trendo Broker, the lowest leverage is 1:25, and the highest is 1:500. This fund, which the broker provides with leverage to the trader, is calculated based on the trader's trading account balance. Like 1:100 leverage which increases the account balance by 100 times.

Leverage & margin relationship

The funds provided with leverage by the brokers to traders are in the form of a margin. For this, it is necessary to learn about Margin first. Then we will discuss the relationship between Leverage and Margin.

What is Margin? The security deposit received from traders by brokers to make a trade is called a margin. This money or security deposit is deducted from the trader's free margin, not the trader's balance. And after closing the trade, it will return to the trader's free margin again with its profit or loss. If the trader has 1000$ in their balance, they also have 1000$ free margin to make a trade. Thus, to make any trade, the trader needs a margin that will be deducted from the free margin. 

 The relationship between margin and leverage is inverse. If the account's leverage is higher, you need less margin to make the trade. For example, Mark and Sam both have accounts in Trendo, with 1000$ in their balance and 1000$ free margin. But with the difference that Mark's account leverage is 1:100 and Sam's account leverage is 1:1000, and they both plan to buy the EURUSD symbol. Mark, who has an account leverage of 1:100, with the magnitude of every 0.01 lot of the EURUSD purchase, must pay 10$ as margin from his free margin. But Sam, who has a leverage of 1:1000, has to only pay 1$ as margin from his free margin for every 0.01 lot of this symbol's purchase. So Sam pays less margin for trades because he has higher leverage. As a result, he can make trades of a higher magnitude than Mark's account.

Why should you use Leverage?

The forex market has very few fluctuations. Other financial markets, like energy, metals, etc., do not have significant instabilities in the day as well. In case the brokers do not provide leverage tools, first of all, the activity in the financial markets will require high assets, and small traders will not be able to use these markets. Secondly, the investors will not receive reasonable profits due to the low fluctuations of these markets.
Thirdly, it will not have an acceptable average monthly or annual return. Therefore, activity in the forex market usually requires leverage.

Advantages and disadvantages of leverage

The advantages and disadvantages of Leverage depend on the trader's personal decisions. In fact, a trader can use Leverage as a tool and feature to earn profit in different situations and with accurate plans, skills, and knowledge. One of the advantages of Leverage is the increase of the trader's assets in making trades, so the trader can use Leverage to make more trades in the market with more diversity. But one of its disadvantages is that if the asset management and the trades' magnitude are disregarded, it will have a very high risk. Then, even though the trader can gain good profit, there is a possibility that without asset management and the trades' magnitude, the trader will suffer great damage and loss.

Leverage conditions in Trendo

As mentioned, in addition to the good benefits of high leverage, if the traders do not have enough skills to use it, there will be very high risk, and rather than profit, it can cause the trader to lose in trading. Therefore, to preserve the traders' assets, Trendo broker has created conditions for traders' leverage so that customers' accounts do not suffer losses and stop-outs in sensitive times and high fluctuations.

Thirty minutes before the news and important economic data, the leverage of symbols related to the news changes to 1:100. Traders can view important economic data in Trendo's economic calendar.
Thirty minutes before the market closes on the weekend or during the week to preserve traders' assets in gap trade, the trading leverage of all symbols changes to 1:100.

If you need more guidance about leverage, you can ask questions in the 24-hour support option in the Trendo application. Our colleagues are always ready to help you.