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What is Leverage?
Video Transcript
In a nutshell, leverage is a fantastic tool that allows traders to control large positions in the market with a relatively small account size. For example, with 1:500 leverage, a trader with just $100 in their account can control a $50,000 position in the market. How cool is that!? This means traders can access opportunities they wouldn’t usually be able to afford in more traditional or institutional markets. In this sense, leverage is especially useful for retail traders because it allows them to participate in global markets without needing a large amount of starting capital.
Before you get too excited, the benefit of controlling more significant positions in the market also comes with increased risk. Like Spiderman said, with great power comes great responsibility… Let me explain…
A big benefit is that small deposits can control significant positions, allowing trades to take advantage of markets they might not be able to access. The risk is that if a trade moves against you, losses can accumulate very quickly, potentially wiping out your account, or having losses that exceed deposits. Yikes!
Another advantage of leverage is that you can amplify or magnify your potential wins and grow your account substantially fast. However, the corresponding risk is that your losses are also magnified. This means a small account can reach margin call levels very quickly, forcing the broker to close out positions.
Another benefit of leverage is that traders can diversify across different assets without tying up large amounts of capital. However, with higher leverage, traders can be tempted to take oversized positions, overleverage their accounts, and increase the risk of larger drawdowns.
To summarize…leverage can be a valuable tool when used correctly, but managing risk carefully is important.
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