Leverage & Margin Trading Guide

Leverage involves using borrowed capital to increase the potential return on investment. The leverage ratio represents the level of exposure to the underlying asset compared to the trader's capital.

Margin is the amount of capital required to open a leveraged position. It is essentially a security deposit. The margin requirement is typically expressed as a percentage of the total position or as leverage ratio.

To open a leveraged trading position, you select your desired level of leverage, commit a portion of your own capital as the margin, and borrow the rest from the broker.

Constantly monitor your leveraged positions due to the increased risk. Markets can move quickly, and losses can exceed deposits, therefore it's crucial to use risk management tools like stop-loss orders.

If the market moves against your position and your losses approach the margin you've put down, you could face a margin call or liquidation. This means your position may be closed at a loss by the broker to prevent further losses.

Implement risk management strategies, such as setting stop-loss orders, only trading with funds you can afford to lose, and having a clear exit strategy for each trade.

When closing a leveraged position, either take your profits or cut your losses. The final outcome will be your initial investment plus or minus the gains or losses from the change in the underlying asset price, multiplied by the leverage used.

While leverage can amplify gains, it also increases the potential for large losses. Never invest more than you can afford to lose and always be aware of the risks involved.

A margin call occurs when the value of your account falls below the broker's required minimum. Be prepared to deposit additional funds or close your position if you receive a margin call.

Leveraged trading is particularly risky in volatile markets since price swings can happen suddenly and may result in significant losses.