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The online brokers that allow investing in the market of the changes propose to their clients to benefit from a leverage. This tool allows you to truly speculate with more money than the capital available, in order to make the benefits more interesting (but also increases the risk of losses).

There are several leverage levels that generally range from 1: 100 to 1: 400. A leverage of 1: 100 means that you multiply your investment on a currency pair by 100. But then where does this money come from? It is simply the agent who lends you this money for free.

Why leverage is essential for forex speculation:

To understand the interest of using leverage when trading in the Forex, it is necessary to understand that the variations of quotes of currency pairs are often very low, compared to other assets such as stock. Without leverage, it would be very difficult to make profits, even if you have a consistent investment capital. With proper Forex education this happens to be a very important matter now.

Advantages and disadvantages of the leverage effect

As we have just seen, the lever effect has some advantages. The main one is that it allows you to obtain more interesting profits in a short time, especially if you operate the shares with the CFDs.

However, the leverage effect also presents a risk that should not be ignored. In effect, although your profits can be multiplied by the chosen coefficient of leverage, your losses can also. So, a position with a leverage effect of 100 that loses a euro will actually make you lose 100 euros. Thus, it is necessary to have sufficient capital in the trading account to cover these possible losses and know how to stop them at the right time.

Using a leverage effect is still a very advantageous method but requires good management to limit the risks and not lose the entire capital due to a bad strategy. As far as stocks are concerned, we advise you to use only weak lever effects, at least as long as you do not completely dominate the market.

Let’s give a concrete example to illustrate this leverage:

Thanks to this defined margin, you can create leverage in a transaction. In summary, the amount of your margin determines the value of your leverage and the leverage also determines the margin.

Conclusion

Therefore, the leverage must be handled with caution as it allows you to record significant gains; it can also cause you to take great risks. It is advisable, for example, to start operating using small leverage effects in order to test the market. Then, you can only increase this leverage if you see that the market evolves in your favor.