Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

ereanoraella

What is Leverage?

Recommended Posts

Leverage is amount of money added proportionally to your deposit (50, 100, 500) when you open an order. While your order is active you can't lost more than your trading margin. When you close your order leverage money return to liquidity provider. For example I trade 1:500 leverage with Hotforex, which means that for one full trade lot (100K $) I need only 200$ free margin.

Share this post


Link to post
Share on other sites

you can look through all the definitions on the net, but when it comes to trading think of it this way.

If your gross exposure to an instrument or portfolio is more than your cash in an account you are using leverage.

This will then apply to futures - as they are traded on margin.

Options - as they can give you extra convexity

shares - if you are trading on margin

shorts - because technically your losses may be greater than what is in your account.

 

 

fxeconomst is incorrect when he says - "While your order is active you can't lost more than your trading margin"

 

The broker will chase you for any extra losses your account sustains as a result of gaps and stops not being sufficient to cover your margin.

Share this post


Link to post
Share on other sites
you can look through all the definitions on the net, but when it comes to trading think of it this way.

If your gross exposure to an instrument or portfolio is more than your cash in an account you are using leverage.

This will then apply to futures - as they are traded on margin.

Options - as they can give you extra convexity

shares - if you are trading on margin

shorts - because technically your losses may be greater than what is in your account.

 

 

fxeconomst is incorrect when he says - "While your order is active you can't lost more than your trading margin"

 

The broker will chase you for any extra losses your account sustains as a result of gaps and stops not being sufficient to cover your margin.

 

Hi SIUYA,

 

What does the term 'gearing' mean? Is this simply the amount of leverage that is used?

 

Kind regards,

 

BlueHorseshoe

Share this post


Link to post
Share on other sites
Hi SIUYA,

 

What does the term 'gearing' mean? Is this simply the amount of leverage that is used?

 

Kind regards,

 

BlueHorseshoe

 

I think it is pretty much the same definition - interchangeable, but while levergae is expressed as a % gearing might be expressed as a ratio.

I also thought that gearing was more the coloquial expression - that family is geared to the hilt, v the more formal business definition - that firm has a leverage ratio of 300% on its assets.

It seems only a few places use this expression but it seems appropriate given the use of gears to increase/decrease speeds!

 

Usually if say you have 4: 1 (or 400%) leverage, it means you have gearing of 4:1.

 

 

........side bar deviation

 

Its an interesting issue as there are lots of definitions around, and I have seen some argue that if say for every $1 in an account, $1 is borrowed this is 100% geared.....which is why one needs to be clear about how they define many things, and exactly what it is they are getting. Which is why I pretty much look at things from an 'exposure' point of view.

 

an example....

when the marketing of 130/30 funds are bandied about then one might think this means it has greater than 100% leverage. However most often the gearing might only be 30%-60%, and some would argue that it is Net Exposure neutral (hence the introduction of gross and net exposures to often disguise gearing IMHO), as the long 30%, v short 30% offset each other......

In my terminology I would say the fund has the potential to have an additional 30-60% gearing/leverage through its gross exposure, but even though its net exposure is likely to be neutral, you still have gearing/leverage.

All too often leverage is hidden, or implicit in many things and yet we over look it - Taleb talks about this in his recent book and like him or hate him, if you look at the leverage you can get in some things in life particularly the leverage from convexity and optionality it changes how you look at things.

 

As an old market maker we often had a lot of gross exposure, a lot of leverage and were highly geared, but we also had a lot of net neutral exposures with low risk. Think of what it costs to buy calls, sell stocks on margin.....and do this many, many times, with offsets whereby puts are sold, or other offsetting calls are also sold.

 

...i deviated a little from my first answer :)

Share this post


Link to post
Share on other sites

Leverage is the ability of a trader to control a big market with a small investment, and this leverage is given by broker. For instance For example, to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1.You can now controlling $100,000 with $1,000.

Share this post


Link to post
Share on other sites
Hi guys,

 

Have a good day. What is correct the meaning - Leverage? Explain me.

 

leverage it's more like a loan from your brokers, makes your deposit would worth higher than initial amount, i used 1:500 on my Armada markets account means, my deposit are worth 500x times, and can made any transaction equal to 500x, have the same potential but also a risk. here's a simple video brief how forex trading works, move to 1:06

explanation.

hope this would help.

Share this post


Link to post
Share on other sites

The power given to traders by brokers to control a bigger amount of money in the forex market; Leverage works like a two edged sword, it can help you make profits quickly and you can loose your account as well from using a large leverage.

Share this post


Link to post
Share on other sites
Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest.

 

Is this explanation complete? It left me hanging

Share this post


Link to post
Share on other sites

When an investor decides to invest in the Forex market, he or she must first open up a margin account with a broker. Usually, the amount of leverage provided is either 50:1, 100:1 or 200:1, depending on the broker and the size of the position the investor is trading.

Share this post


Link to post
Share on other sites
Leverage means the advantageous condition of having a relatively small amount of cost yield a relatively high level of returns.

 

Exactly, go detail in trading, higher leverage allow you to trade higher volume with less fund.

Share this post


Link to post
Share on other sites

Leverage is an investment strategy of using borrowed money — specifically, the use of various financial instruments or borrowed capital — to increase the potential return of an investment.Leverage can also refer to the amount of debt a firm uses to finance assets.

Share this post


Link to post
Share on other sites

Leverage has slightly different meanings in personal finance, investing and business. But in each case, leverage is the use of debt to help achieve a financial or business goal. Leverage is the use of borrowed funds to increase one's trading position beyond what would be available from their cash balance alone. Forex traders often use leverage to profit from relatively small price changes in currency pairs. Leverage, however, can amplify both profits as well as losses.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.