How does leverage work?
To get a good understanding of the Forex/CFD market, the first step is to understand how the leverage ( leverage) scheme works. So let’s assume for a start that we have the amount of PLN 10,000 in our brokerage account. This will make it easier for us to understand the rules with a concrete example.
What is the extent of leverage?
As a general rule, the range of leverage worldwide varies from a level of 1:1 to as high as 500:1, with a maximum leverage of 30:1 for individuals in Europe according to the latest regulations.
How is leverage calculated?
So if you have a capital of PLN 10,000, and the level of leverage you are using is just 30:1, you can use 30 times the capital you have in your investment account to invest. So at your disposal in this case you have PLN 30,000.
What is leverage?
How does it happen that we have more capital to trade with than we paid to the broker? It can be explained in such a way that the broker gives the client a kind of interest-free loan, and this is where all the magic of leveraged instruments lies.
On the other hand, however, it is important to remember that leverage also works the other way. The moment our open position loses value, i.e. goes in the opposite direction to the intended one, our capital also decreases according to the amount of leverage.
Example:
We open a position with PLN 2,000 of the underlying capital, so after leverage (30:1) it has a value of PLN 60,000. The moment the position starts to lose, we have to cover the loss from our deposited capital in the account. Thus, a 10% loss on this position will result in a capital loss of PLN 6,000, not PLN 200. In the same way, leverage works the other way, i.e. with a profit of 10%, we will earn PLN 6,000 with PLN 1,000 of capital securing the transaction.
The next step is to understand how the margin works (go).
Also find out what it is:
