Leverage is a powerful tool that can be used to amplify a trader's exposure to an underlying asset beyond what would be available with their cash balance. It works by using a deposit, known as margin, to provide greater access to the asset. Leverage is expressed as a ratio that is applied to the amount of the margin to determine the size of the trade. Most leveraged trades use derivative products, meaning that you trade with an instrument whose value is based on the price of the underlying asset, rather than owning the asset itself. AvaTrade requires a retail trader to have capital equivalent to at least 50% of their margin used in MetaTrader 4 and AvaOptions accounts.
AvaTrade offers a variety of instruments, each with different leverage available, which can also change depending on the trading platform you choose to work with. Risk is inherent to any type of trading; however, leverage can increase both profits and losses. When you trade with leverage, you gain full exposure to the full value of the trade with a small initial outlay. Leveraged traders often use a number of tools, such as stop-loss and profit orders, that help mitigate the risk of loss and reduce the need to continuously monitor open positions. Conservative traders tend to use the minimum possible level of leverage, while traders with a large appetite for risk can use leverage flexibly.
Volatile markets, such as gold and Bitcoin, should be traded with minimal leverage, while less volatile assets that do not register large price fluctuations, such as the EURCHF pair, can be traded with higher leverage levels. This way, if you have used particularly high leverage in the trade, there will be less chance of multiplying your losses, regardless of market volatility.Before using leverage, traders should carefully evaluate their own willingness and ability to take the associated risks. It would be wise for traders to pay special attention when choosing the leverage they will use. Both describe borrowing to operate in financial markets; however, leverage refers to the act of borrowing, while margin is the real money or debt that the trader has contracted to invest in financial markets. By trading with leverage on any of these products, an investor can place a bet with a reasonably small margin depending on the direction in which the market of their choice will move.
When searching for leveraged trading providers, you might find higher leverage ratios; however, keep in mind that using excessive leverage can have a negative impact on your positions. In conclusion, it is important for traders to understand how leverage works and how it can affect their trading strategy. Leverage can be used as an effective tool for increasing profits; however, it should be used responsibly and with caution. Leverage should only be used when traders are confident in their ability to manage risk and understand how it works.