Ever wished you could trade with more money than you actually have? In forex, you can-thanks to leverage! It’s like a financial superpower, giving you more market exposure with a smaller investment. But as with any superpower, it comes with responsibility. While leverage can boost your potential profits, it can also magnify your risks. 

Let’s break it down.

Leverage: Your trading amplifier

Think of leverage like a magnifying glass-it enlarges your market exposure. With a small upfront deposit (your "margin"), you can control a much larger trading position.

Let’s say you have $100 to trade. With a leverage of 1:100, you can control $10,000 worth of currency. It’s like lifting 10 times your weight! Sounds great, right? But if the market moves against you, losses can add up just as fast.

A quick example:

Imagine you want to buy 10 shares of a stock at $160 each. That’s a $1,600 trade.

• With 1:10 leverage: You only need to invest $160 of your own money.
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• If the price rises by $40: You still make a $400 profit.
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• If the price drops by $20: You lose $200, which could be a big chunk of your initial investment with leverage.

Margin: Your security deposit

To use leverage, you must put down a deposit called margin. This acts as a safety net for the broker, ensuring you can cover potential losses.

Types of margin:

• Used margin: The amount currently locked in your open trades.
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• Free margin: The remaining balance available for new trades.

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Margin call: The warning signal

If your losses mount and your margin level drops too low, your broker might issue a margin call-a warning to add more funds or risk having your trades closed automatically. To stay on top of things, use online margin calculators to gauge your risk.

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The takeaway: Handle leverage with care

Leverage can be a game-changer-but it’s not a free ride. Think of it like driving a sports car: thrilling and powerful, but requiring skill and caution.

• Start small and increase your exposure gradually.
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• Never risk more than you can afford to lose.
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• Use stop-loss orders to protect your capital.

Before jumping in, learn the ropes with our free forex courses on Deriv Academy or practice with a demo account. Once you’ve mastered leverage, you can use it wisely to maximize your trading potential!

Log in to Deriv Academy with your Deriv account email and password to start learning today!