Practice shows that many traders and investors who have traded so far on crypto-exchanges only, do not understand very well what leverage is and what benefits and risks it implies. In fact, such a leverage is just a tool that multiplies opportunities for a trader.
Let us explain for those who do not know: a credit leverage is the amount of credit funds that a broker provides a trader with for making transactions on the market, automatically and without any collateral. Thus, if the maximum leverage ratio is 1:1000, having $100 in the account, the trader can make transactions for purchase/sale of foreign currency or other financial instruments worth 1,000 times more than their own funds, that is, $100,000.
In case of luck, the trader's profit will grow proportionally to the leverage. But the losses will increase in case of failure as well. This is what has divided traders into two camps. In the opinion of the first, a high leverage will inevitably lead to a loss of the deposit, in the opinion of the latter, it is an excellent trading tool, which gives an opportunity not only to increase their profits many times but also ... to seriously reduce trading risks. That is, the leverage is a tool like many others, like, say, a hammer. Those who know how to use it correctly, can build a whole house, and whoever does not, will be left without fingers very quickly.
Here is another example, even more obvious. Your car has a capacity of going at a speed of 200 km/h. But this does not mean that every time you leave the house, you immediately press the pedal to its limit. No, you will drive using the potential of the car for a quarter or a third. But when it is necessary and the situation allows, it is possible to go faster.
One should clearly understand that the size of the leverage does NOT affect the level of risk! The risk is managed by traders themselves, when they open a position of this or that volume!
Manuals on money management often write that professional traders never risk amounts exceeding 5% of their deposit. The statement is controversial, and it all depends on the strategy that one or another trader uses. But what is beyond doubt is that no trader in their right mind will use all 100% of their capital in one single transaction, as this is a guaranteed way to lose all their funds quickly.
And here is a concrete example (in practice, it is also necessary to consider broker's commission and swaps when you do the calculations).
Suppose your deposit is $100, and, as books on money management recommend, you have decided to open a transaction on BTC/USD, for 5% of your capital, that is, $5. If you do not make use of the leverage, at the price of 1 Bitcoin equal to $ 10,000, you can buy 0.0005 of Bitcoin with this amount. And, if it grows by 10% during the day, that is, by $1000, your profit will be 50 cents. In general, this is not bad. But using a leverage of 1:1000, the same $ 5 can buy is not 0.0005, but 0.5 Bitcoin. And your profit, accordingly, will be equal to $500.
You will agree that this is not just good, but amazing - having risked just $5, you have earned $500! But this is only possible if the price went in the direction that you need, straight away. And what if, instead of starting to grow, it started to fall?
And here the opponents of a large leverage celebrate. Oh yes, if you trade without leverage, bitcoin should collapse from $ 10,000 to zero for you to lose your $ 5. When using the leverage ratio of 1:1000, it's enough for the price to drop by only $ 10, which is a common thing.
But! It is here that the knowledge of tactics and trading strategies in the financial markets is required. When trading at such a broker as NordFX, you can easily hedge the risks, opening, for example, a position to sell bitcoins at the same time when you open a position to buy them. Yes, you will lose a bit on the spread or commission, but, in parallel with losses on one transaction, the profit on the other one will grow. And for you to be able to foresee the trend reversal in time and determine the optimal points for opening and closing positions, there are a lot of various, time-tested indicators and other technical analysis tools at your service on the MetaTrader 4 platform.
In addition, the leverage, while creating a large reserve of free funds, will allow you to diversify risks in many other ways, including the parallel opening of transactions on other trading instruments - cryptocurrencies, traditional currency pairs or precious metals, automatic copying of transactions of other, more experienced traders, or, for example, trade with the help of expert advisers.
And now let's sum up the above. The main advantage of leverage is that it gives a trader the freedom to maneuver in the market. Wherein:
The larger the leverage ratio is, the more are the free funds you have!
And once again, we repeat three axioms that cannot be doubted: