Boosting Your Trades with Leverage
Now it is time to address one of the most important concepts of currency trading: Leverage
The Leverage, aka the Booster on Cashout, is the use of borrowed capital to make an investment. In the case of currency trading, leverage is quite straightforward.
As always, let’s explain it using an example.
Let’s say you have $100 to trade. If you were to trade this $100 alone, without the use of a Booster (Leverage), a single pip would be worth around 1 cent. So, if you make a trade and the exchange rate fluctuates by 1 pip, you will have made a hefty 1 cent in profit!
Not very interesting right?
This is where a booster comes in. A booster is basically money that your broker loans you to make a trade. So if you use a booster of x 10 (also known as a leverage multiplier of 1:10) on your trade of $100, you will actually be trading $1000. In other words, you put $100 into the trade and your broker puts in $900. When trading $1000, a single pip is now worth around 10 cents!
And you can keep going from there. A booster of x 100 (leverage 1:100) means you will actually be trading $10,000, and a pip is now worth around $1. If you trade with a booster of x 1000, your trade amount will be $100,000 and a pip is worth $10!
Let's say you make a EUR/USD trade at 1.05709, using $100 USD with a booster of x100. At the end of the trade, the exchange rate rose by 4.7 pips to 1.05756. When you cash-out of the trade you have $104.43. Without the leverage your new balance would have been $100.04.
Pretty cool right? In other words, adding leverage to your trade can greatly increase your potential profits.
But wait… if the broker lends me money, don’t I have to pay him back?
Good question. The answer is yes, you do. If we take a look at the above example of $100 USD with a booster of x 100, the broker technically lent you $9900 to make the trade. At the end of the trade you still have to reimburse the broker $9900. But, you get to keep the profits.
So, leverage is basically free money… but what happens if your trade goes sour?
If your trade goes poorly, and you start to lose money, then leverage has the opposite effect. Not only does leverage impact your profits, but also your losses. To illustrate, let’s again use the above example.
You make a EUR/USD trade at 1.05709 predicting a rise, using $100 USD with a booster of x100. At the end of the trade, the exchange rate fell by 5 pips to 1.05659. Because you predicted a rise, but the exchange rate actually fell, you make a loss of $4.73. When you cash-out of the trade you first repay the banker $9900 and your new balance is $95.27. In other words, leverage also increase the amount of money you can lose.
Leverage and risk
From the above illustration we have seen that leverage will not only impact your profits, but can also impact loses. Therefore, using a Booster means taking on an element of risk: the higher the booster, the greater the risk. Your job is to determine a comfortable level of risk. This means asking yourself: “how much money am I prepared to lose on this trade?”
Lets use an extreme example.
You make a EUR/USD trade of $100 with a leverage of x1000, meaning that you actually trade $100,000. The exchange rate is 1.05719 at the start of the trade. You predict a rise, but then the exchange rate plummets by 10 pips ending in 1.5619. You reimburse the broker $99,900, and are therefore left with $5.32. Yes, you just lost a whopping $94.68 in just a few minutes! If you are comfortable with this, then fine! By all means make trades using x 1000 leverage. However, if you are not, it is best to use a lower booster when making trades.
In other words, taking on leverage also means taking on risk. Use it carefully and be sure that you remain within your comfort zone.