What is Leverage in Forex Trading?

 In general, leverage is the use of borrowed funds to increase the potential return (return) of an investment. In some cases, leverage usually also describes the company's ability to use funds that have a fixed burden to maximize the wealth of the business owner.

Leverage and Trading Relationship

What is Leverage ?

What is Leverage in Forex Trading
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In the world of trading, leverage is the use of borrowed funds to increase the potential return of an investment. In trading such as forex, leverage appears in certain ratios, such as 1:25, 1:50, 1:100, and so on. The amount of the number describes how much capital (margin) is needed to obtain loan funds.

This is why, forex traders are required to learn about leverage before jumping into this field. Especially at this time, all brokers must provide leverage facilities for traders with various ratios. Because for traders, the greater the leverage means the greater the capital power to trade.

From the previous explanation we can conclude that leverage is one of the important factors in the world of trading. The existence of leverage can reduce the capital to play forex while increasing the ability of the cost of traders to transact.

Types of Leverage

Generally, there are 3 types of leverage, namely:

Operating Leverage

According to some experts, operating leverage is the amount of funds in a company that is used for operations. The existence of operating leverage is expected to help increase sales figures in a company. Because in this type of leverage, the existence of fixed costs is the reason a company is able to cover all operational costs so that it can maximize focus in other fields that require large investments, in this case sales.

Financial Leverage

While financial leverage is a source of funds from outside the company that has a fixed burden in the field of financial management. This type of leverage is considered to be able to increase profits because it can provide profits in larger amounts when compared to the company's fixed costs.

Combined Leverage

Combined leverage arises when a company is able to obtain and manage operating and financial leverage properly. The combination of the two leverages is very useful for the company because it not only provides benefits for business owners but also shareholders.

Leverage Risk

Every action in increasing the profits of a company must have its own risks, as well as leverage. To anticipate all possibilities, whether good or bad, it helps us to know what are the leverage risks that traders must know, namely:

The greater the leverage, the more difficult the profit

The most crucial thing and must be underlined is, the high and low leverage is not directly proportional to profit. So the greater the leverage, the more difficult it is for a company to collect profits. This is why it is highly recommended to use only proportionate amounts of leverage.

The greater the leverage, the more psychological burden

In the investment world, the law of “high return, high risk” will always apply. That is, the greater the leverage used in managing an investment, the greater the chance of experiencing losses.

From the explanation above, it can be concluded that although the leverage position in trading is quite important, as business actors we must be careful in deciding every financial step. Because the calculation of the repayment of loan funds is the main responsibility of a company.

Do the calculations well so that when we decide to take advantage of leverage, we can get the results we want. That's an explanation of the role of leverage in the world of trading. May be useful.

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