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How does leverage work?

Greater potential returns (or losses)

When you start trading, you must first open up a margin account with a broker. The amount of leverage provided by a broker is usually expressed as a ratio such as 1:10, 1:50,1:100 or 1:200, depending on the size of the position you are trading.

Example:

For example, if you are required to maintain a minimum 2% margin in your account, you must have at least 2% of the total value of your intended trade available in your account before you can proceed. Expressed as a ratio, a 2% margin is equivalent to a 50:1 leverage ratio (1 divided by 50 = 0.02 or 2%).

Hence, with just $1,000 of margin available in your account, you can trade up to $50,000 at 1:50 leverage with the potential to earn rewards on the equivalent of a $50,000 trade.

However, as well as having the earning potential of $50,000, you also face the risk of losses based on a $50,000 trade which can add up quickly. Trading with too high a leverage is a common error made by novice traders so it is advisable to trade with a lower ratio until you become more experienced.

 

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