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Trading Academy Trading Basics - Lesson 5 /16

What is leverage?

And how could it boost your potential profits?

Leverage is when you are effectively provided with extra money so that you can make larger trades in the markets – allowing you to make potentially larger profits (or losses). The easiest way to explain how this works, is to use an example:

Let’s say you only have EUR 100 of your own money to invest and your investment increases by 10%. You now have EUR 110. Well done! However, by employing Leverage your returns could have been even better – let’s see how.

Now imagine you were provided with Leverage at a ratio of 30:1. By employing exactly the same amount of cash, EUR 100, you would now have a ‘buying power’ of EUR 3,000 (EUR 30 x 100). This is the effect of Leverage.

What would happen to the same trade in this example? Well, instead of making a very decent profit of EUR 10 as before, you now would have seen the same 10% return but on a trading position of EUR 3,000…giving you a return of EUR 300! As you can see, the Leverage of 30 has magnified your returns by 30.

Why Leverage?

When you place a CFD or FX trade with us we’ll only ask you for a small part of the total value of the trade. Effectively we provide you with the rest. That means you can use Leverage to magnify your potential profits.

But be careful…

The downside to Leverage is that it can magnify your losses in the same way it magnifies your profits. So, if things go wrong you can end up losing higher amounts than you would without Leverage.

The best way to protect yourself against losses is by managing your risks. To find out more, read this article.

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