How does leverage works?
Leverage is about the use of money borrowed by a platform that you are using and in this way increasing the performance of an investment by being able to invest more of the money you have. The use of leverage works because once you make a profit, you can pay off the loan with part of the profit and in this way you will see good results.
The concept of leverage is very well known in the Forex market, as it is the most common among traders. So if you borrow money from a broker, then you can trade larger positions in a currency. After that, you will see how the leverage magnifies the returns of favorable movements. But there is a problem, leverage can bring you big profits or big losses if you don’t use it wisely.
What are the risks of leverage?
As we specified earlier, through the use of leverage significant gains can be made, but it can also represent a point of no return where the trader has a lot of losses. Let me explain, if the currency you are trading makes a movement opposite to what you expected then the losses will be great.
For this reason you should be aware of the fact that leverage should be used in a judicious and orderly way, you should not use as much and you should focus on using only what is necessary. This is also avoided with the use of stop loss which is a trade order with the broker that is used to automatically exit a position at a certain price level.