What is leverage?
Leverage, AKA risk level, is a temporary loan given to the trader by the broker. It enables you, as the trader, to open a trade of a larger size with a smaller amount of invested capital. Leverage is presented in the form of a multiplier that shows how much more than the invested amount a position is worth.
The best way to understand leverage is through an example of how it affects your profit or loss potential. If you trade with no leverage at all and invest $1,000, for every 1% move in the market you can gain or lose $10 which equals 1% of $1000.
In comparison, if you were to invest the same $1,000 and trade using x100 leverage, the dollar value of your position will be equal to $100,000.
1% of $100,000 equals $1,000 so for every 1% move in the market you can gain or lose $1,000.
For more information about Leverage, please take a look at the following link: http://www.etoro.com/trade/leverage-and-margin.aspx
When opening a trade, you can decide if you wish to use leverage or not. Different instruments have different leverage limitations:
- The maximum leverage for Stocks ranges between x5 and x10
- The maximum leverage for Currencies ranges between x50 and x400
- The maximum leverage for ETF's is x5
- The maximum leverage for Commodities and indices ranges between x10 and x100
- It is not possible to use leverage when trading Cryptocurrencies
*Please note that the use of leverage carries with it a higher degree of risk because leverage augments both gains and losses. If you use leverage on a trade and the market moves against you, your loss per pip will be greater than if leverage had not been applied.