What is Leveraged Trading, How is it Done, What are the Risks?

We all want to increase our earnings in some way, and for this we make different investments in forex, that is, in international foreign exchange markets or crypto currency exchanges. However, if we have limited capital, no matter how well we invest, our earnings will be limited. This is where the leverage system comes into play. Leveraged trading, which has been in our lives for many years, increases both the risk and the profit of the investor.

Leveraged trading, which was carried out only in international foreign exchange markets in the early days, started to show itself in the field of digital investment with the emergence of the concept of crypto money and the exchanges where these assets are traded. It can be confusing for investors with no previous experience in this field. what is leverage tradinghow to Let’s take a closer look and see the risks you need to be extremely careful about.

Let’s start with the basics, what is a leverage system?

With the abolition of the Bretton Woods agreement in the 1970s, concepts such as volatility, swap and leverage emerged in the international foreign exchange markets. Leverage, the leverage system, It is a system that allows investors to trade in forex, that is, international foreign exchange markets or cryptocurrency exchanges, at a much higher rate than their capital.

So what is leveraged trading?

Investment rates in the leverage system, which has been widely used in our country since 2012 It is regulated by the Capital Markets Board. Transactions made by investors in international foreign exchange markets or cryptocurrency exchanges at a higher rate than their capital over the rate regulated by the Capital Markets Board are called leveraged transactions.

What is the leveraged transaction rate in Turkey?

Organized by the Capital Markets Board in our country leveraged trading ratio is determined as a maximum of 1 to 10. This leveraged trading ratio, shown in figures like 1 : 10, 1/10, is fixed. All markets and exchanges offer their users the opportunity to trade leveraged at this fixed rate. However, in different country markets, this ratio can be 1:100 or even 1:125 in cryptocurrency exchanges.

Fine, but what does it all mean, what does leveraged trading mean?

It means 1 to 10 leveraged trading, by opening a position of maximum 10 thousand dollars with the investor’s capital of $ 1000 It means you can trade. In other words, thanks to leveraged trading, the investor can trade as if he has 10 times the current capital ratio. The profit and loss ratios of the transaction are calculated over the investment amount in question. In other words, leveraged transaction means a high rate position that can be opened with low collateral.

How is leveraged trading done? Let’s explain through an example:

Let’s say you have a certain capital and the price of an ounce of gold $1400, on a position with a lot size of 1, 1 lot of 100 ounces By buying dollars, you will enter the forex market. Your position size for this position is $140,000, and the minimum margin you need to deposit for a 1:10 leveraged trade is $14,000.

After opening a position in this way, the gold price became $1420. So there is an increase of $200 under 1 lot. But you traded with leverage of 1:10. So you played 10x. Therefore in this position The profit is 2000 dollars. If you had traded normally, your profit would have been only $200.

Let’s look at the scenario where you will lose. After opening the position, the gold price was $1380. So there is a $200 decrease under 1 lot. But you traded with leverage of 1:10. So you played 10x. Therefore in this position Loss incurred is $2000. If you had traded normally, your loss would have been only $200.

Don’t get carried away before you find out: What are the risks of leverage trading?

• Your damage will be much higher.
• There is a borrowing fee.
• There are no shareholder privileges.
• There is a margin call.

Your damage will be much higher:

The biggest risk you should be aware of about leverage trading is the profit will be 10 times, and the loss will be 10 times. As we saw in the example above, both your profit and loss will be high because you make an investment of x10. Even in crypto exchanges, sometimes this rate can be even x125, so it is possible to make a loss that you cannot imagine.

There is a borrowing fee:

The basis of the leverage system is to borrow money from the platform you are trading. In other words, leveraged trading means borrowing. take this debt and to keep your position open Regardless of profit and loss, you have to pay a certain fee to the platform you trade on. Even if this fee varies according to the position, you will still have a continuous expense.

There are no shareholder privileges:

When doing this kind of operation under normal circumstances The property becomes your property. Because of this state of belonging, you have many different advantages. However, in the leverage system, the asset in question does not belong to you. Therefore, it is not possible to use dividends and similar opportunities.

There is a margin call:

Let’s say you are involved in the leverage system and you open a position and trade with leverage. In case of loss in position not always, but the platform you are trading may require additional resources from you. This additional resource is required to keep your position open. If you do not provide this additional resource, you may have to exit the position.

If you think there is nothing good, here are the advantages of leveraged trading:

Of course, the biggest advantage of trading leveraged by opening positions in the leverage system is high profit rates. After all, we are talking about a ratio of 1 to 10. It’s a pretty high rate even for small collaterals. Since you can trade at a higher rate, it also provides investment diversity and thus you gain the advantage of increasing your profits.

Another advantage of trading with leverage is the ability to trade on both sides. While making various investments on the one hand, it can profit from an increasing market, On the other hand, you can make a profitable investment by opening a position in a falling market, thinking that it will increase in the future. In addition to all these, the market you are trading may also offer you additional advantages because you are trading with leverage.

We encounter in the international foreign exchange market forex and crypto currency exchanges. What is leveraged trading, how is it done, what are the risks We talked about the details you need to know about the subject by answering frequently asked questions. What we tell is for informational purposes only, none of it is investment advice.