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Leverage Formula:
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Leverage in trading refers to using borrowed capital to increase the potential return of an investment. It allows traders to gain larger market exposure with a smaller amount of invested capital.
The calculator uses the leverage formula:
Where:
Explanation: The ratio shows how much the position is magnified compared to the trader's own capital. A 10x leverage means for every $1 of margin, you control $10 worth of assets.
Details: Understanding leverage is crucial for risk management. Higher leverage increases both potential profits and potential losses. Proper calculation helps traders maintain appropriate position sizes relative to their account balance.
Tips: Enter position size in USD (total value of trade), margin in USD (amount required to open position). Both values must be positive numbers.
Q1: What is considered high leverage?
A: Leverage above 10:1 is generally considered high, though this varies by asset class. Forex trading often allows much higher leverage than stock trading.
Q2: How does leverage affect risk?
A: Higher leverage increases both potential gains and losses. A small price movement can result in significant percentage gains or losses relative to the margin.
Q3: What's the difference between leverage and margin?
A: Margin is the amount of capital required to open a position, while leverage is the ratio of position size to margin. They are inversely related.
Q4: Are there limits to leverage?
A: Many regulators impose leverage limits to protect retail traders. Professional traders may have access to higher leverage.
Q5: How should I choose my leverage level?
A: Choose leverage based on your risk tolerance, trading strategy, and the volatility of the asset being traded. Conservative traders typically use lower leverage.