What is leverage, under what conditions is it provided, what is dangerous

Обучение трейдингу

What is financial leverage (financial leverage, leverage), the essence of the concept in trading in simple words with examples, danger in practice and possible benefits.
What is leverage, under what conditions is it provided, what is dangerous

The concept of leverage in trading – educational program for beginners in simple words about the complex

Financial leverage is a broker’s service to provide a loan of cash or assets. Target loan – funds are provided for the purchase of liquid stocks, bonds or currencies. The funds on the client’s balance act as collateral. Trading with leverage is called margin lending. The collateral for obtaining a loan from a broker is margin. Leverage on the exchange allows you to open transactions in an amount exceeding the trading account balance by 5, 100, 500, and more times. When a trader believes that the likelihood of a successful trade is high, he leverages the leverage and makes a large profit.
What is leverage, under what conditions is it provided, what is dangerousKr.leverage in numbers [/ caption] Without the use of financial leverage, it would take more time and effort to achieve such a result. https://youtu.be/hGII_mWGKxk

How to calculate leverage – calculation examples, calculator

Let’s show by an example what leverage is in simple words. Let’s say a trader’s account balance is $ 1000. He buys Gazprom shares for the entire capital (leverage 1 1) for $ 5 a share, there is enough money for 200 shares. But suddenly positive news comes out on the Nord Stream and the trader predicts a rapid rise in the stock. There is no own funds to buy more shares, but the broker provides a leverage of 1 to 5 and the trader buys shares for another $ 4000. At the same time, there are 1000 Gazprom shares on the balance sheet, the trader’s own funds of $ 1000 are blocked, the broker took these funds as collateral (margin).
What is leverage, under what conditions is it provided, what is dangerousCalculation of financial leverage [/ caption] The trader bought 1000 shares (and not 200 if he did not use leverage) and if the forecast is correct, the profit will increase 5 times. If the price increases by 5%, the account balance will increase by 25%. After completing the reverse transaction – the sale of shares, the broker will receive the loaned money back, and the profit will go to the trader. In case of an erroneous forecast, losses grow at the same rate, but more often they are limited to the amount on the trading account. The broker will compulsorily close the deal, return his money, and the amount will remain on the client’s balance – the financial result between the price of opening the deal and liquidating the position. In our example, when the price moves against the forecast by 10% (the amount of funds on the account is 50% less than required), the broker will send a notification (“Margin Call”).
What is leverage, under what conditions is it provided, what is dangerousHow margin call works [/ caption] A trader can either cut a position (partially or completely) or add money to the account to meet margin requirements. Otherwise, if the quotes fall by another 5% (the amount of funds on the account is 25% of the collateral), the broker will forcefully close the position. The trader will have $ 250 left. An example of using the Binance leverage calculator on the link on the official website at https://www.binance.com/ru/support/faq/360036498511:
What is leverage, under what conditions is it provided, what is dangerousHow leverage works in Binance – risk and liquidation calculator on Binance Futures: https : //youtu.be/cg90lRpzkGo

Leverage for trader and investor

A trader is an individual or legal entity that makes transactions on the exchange, tracking the market patterns and calculating the short-term perspective. An investor is an individual (or legal entity) who buys assets on the exchange with the aim of making a profit in the form of interest or by increasing the market value. The investor evaluates the fundamental indicators of the company, the situation in the country and in the world and invests, hoping to make a profit in the long term. However, the main difference between a trader and an investor is that the trader clearly understands at what price level the position will be closed with a loss. The investor is ready to suffer losses for years if the fundamental situation remains favorable. An experienced trader can keep risks at the same level regardless of the leverage used, while successful trades will be much more profitable.The investor cannot control the risk when trading with leverage, the transactions are long-term and the loan fee does not pay off. Is it worth using leverage in trading – the risks, dangers and benefits of leverage: https://youtu.be/qlH8FBN7MF4

Risks and Benefits

Leverage is a tool. Any instrument in the hands of an experienced craftsman is capable of creating masterpieces, while for a beginner it can only cause pain and disappointment. Leverage provides the following options:

  • make transactions for amounts that are many times higher than the trading deposit;
  • increase the deposit many times in a short time;
  • open deals with a forecast for a decrease in quotations, in this case the trader borrows not cash, but assets. The resulting shares are sold at the market price, and then, if the circumstances are favorable, are bought at a reduced price. The shares are returned to the broker and the trader makes a profit;
  • make transactions without delay, without waiting for the transfer between trading floors to be processed.


What is leverage, under what conditions is it provided, what is dangerousFinancial Leverage 1 to 10 [/ caption] Risks:

  • with poor risk management, loss of capital in a short time;
  • in some cases (when trading derivatives through a licensed broker in the Russian Federation); loss of an amount exceeding the deposit several times.
  • rules for working with leverage;
  • do not use leverage without experience, collecting trade statistics. Make sure your trading strategy is profitable;
  • read the agreement with the broker carefully. Do not trade volatile assets with leverage (for example, gas, oil, crypto currencies) with brokers who do not have a security deposit in case of force majeure and shift losses onto the client’s shoulders;
  • clearly define the rules for exiting a trade in an unfavorable situation.


What is leverage, under what conditions is it provided, what is dangerousLeverage is dangerous with consequences for the trader – complete loss of capital in case of unsuccessful trading [/ caption]

Features of leverage on different platforms – Forex, stock market, binance

Stock market

When trading shares on the Russian stock market, most brokers provide a margin trading service. BCS and Finam provide margin lending automatically to all customers (within the framework of the FFMS standards). Starting this year, there are restrictions on the amount of leverage and the choice of securities for investors who have not received the status of a qualified investor. In Tinkoff Investments, the margin lending service is disabled by default; to use it, you must enable the option in the settings. Sberbank broker does not provide a leverage higher than 1 to 1 while the client’s assets are less than 500 thousand rubles.
What is leverage, under what conditions is it provided, what is dangerousThe broker allows you to make deals not with all stocks and bonds, but only with the most liquid ones. You can view this list in your personal account in the “List of margin securities” / “List of liquid securities” section, etc. The broker does not allow you to buy assets that are not included in this list using leverage. You will also not be able to make an uncovered sale on them. The amount of leverage depends on the risk group in which the broker took you, as well as on the discount for a specific security. For example, for Gazprom shares the discount for buying (long deal) is 10%, for selling (short deal) 25%. This means that with a deposit of 100 thousand rubles, you can buy shares for the amount of 100,000 / 0.1 = 1,000,000 rubles, or sell for the amount of 100,000 / 0.25 = 400,000 rubles.When opening and closing a margin transaction within one trading day, the broker provides funds for free. When a position is rolled over, a fee will be charged every 24 hours (triple the weekend on Wednesday). The fee for providing leverage is different for each broker, but is about 15-20% per annum. When holding a trade in the range of up to a week and making a multiple of the profit, the fee seems insignificant. The situation changes when you have to hold a losing margin position for a long time.when you have to hold a losing margin position for a long time.when you have to hold a losing margin position for a long time.
With a deposit of 200,000 rubles and an open margin position of 1,000,000 rubles, only the leverage fee will be 80,000 rubles. And this is almost half of the deposit. In addition, if the shares do not stand still, but move opposite to the forecast, this will lead to the ruin of the investor.

Forex

In the forex market, 1 standard lot is equivalent to 100,000 currency units. Most forex traders do not have such an amount, therefore, dealing centers offer fractional contracts from 0.01 standard lot (equivalent to 1000 currency units) and provide leverage. According to the legislation of the Russian Federation, forex brokers licensed by the Central Bank are not entitled to provide leverage above 1 to 50. The maximum leverage of alpha forex is 1 to 40.
What is leverage, under what conditions is it provided, what is dangerousLeverage on Forex [/ caption] Forex brokers operating in the Russian Federation without a Central Bank license offer leverage of 1 to 200, 1 to 500 and even 1 to 2000 for currency. The client has the right to choose the required leverage on his own. It can be difficult for a beginner to decide which leverage to choose. You should not start from the leverage, but from the potential loss in the transaction. Regardless of the size of the leverage, the risk per trade is constant, depending on the size of the deposit and the trading strategy. It is recommended not to exceed the threshold of 2-3% of the risk per trade. The maximum possible risk is up to 10%, with a trading system with a high percentage of positive trades. The forex calculator will help you calculate the level of losses in each specific trade. Beginners are advised to start with even lower risk – 0.5-1%. If the deposit is only $ 100, it seems like a ridiculous amount.The risk per trade must not exceed $ 1. The maximum leverage should be chosen from those provided by the broker. Otherwise, there will not be enough funds to open the minimum lot. But clearly control risks and work with a minimum lot until the deposit increases.
What is leverage, under what conditions is it provided, what is dangerousMargin requirement [/ caption] You shouldn’t chase big profits at the first stage. Avoid volatile assets at first. First, it’s worth collecting statistics. make sure the trading approach is profitable. On small amounts, he will make sure of the decency of the broker. On the Internet, you can find negative reviews about many forex brokers, with accusations of fraud. Most often, it turns out that the client has violated the risks and blames the broker for his failures. For CFDs on Forex, the default leverage is 1 to 100. This parameter cannot be changed. It remains to regulate the risk yourself. Clearly limit the level of losses in each transaction and not open positions more than the deposit allows.

How leverage works on Binance

Due to the high volatility of cryptoassets, margin trading carries greater risks compared to the stock or foreign exchange market. Before starting to trade futures, or cryptocurrencies, the system will offer to take a test. There will be no access to trading until the system makes sure that the client fully understands the Binance leverage mechanism. Correct answers are highlighted in green. After a few tries, even a complete beginner will learn the basics. By default, Binance provides 20 leverage for futures trading. [Caption id = “attachment_7649” align = “aligncenter” width = “467”]
What is leverage, under what conditions is it provided, what is dangerousLeverage 20 [/ caption] It can be changed independently for each new deal. For beginners who registered an account less than 60 days ago, this is the maximum leverage. What is leverage, under what conditions is it provided, what is dangerousHow to set up leverage on Binance [/ caption] Next, Binance will increase the maximum leverage, its size depends on the token and on the nominal value of the position. The larger the size of the position to be opened, the lower the leverage is provided. So for bitcoin with a size of up to 50 BTC, a maximum leverage of 1 to 125 is provided, for tokens with a nominal position size of up to 50,000 USDT 1 to 50.
What is leverage, under what conditions is it provided, what is dangerousLeverage 1 to 50 [/ caption] Binance Futures offers 2 margin calculation modes

Isolated margin

When you select the isolated margin mode, the funds are blocked and the funds are calculated separately for each coin. This helps in case a “black sheep” is wound up in the portfolio. Liquidation occurs only for one position, and does not lead to the liquidation of all positions.
What is leverage, under what conditions is it provided, what is dangerousMargin calculation [/ caption]

Cross margin

Cross-margin mode is suitable for experienced traders who build a portfolio based on correlations. The margin is divided across all positions. This is how profitable positions support losing ones. With a sharp collapse or take-off of one position, the entire futures account is liquidated. It is recommended to close deals without waiting for liquidation using stop orders. It is not always possible to calculate the stop order level accurately. The financial market is rife with manipulation, in which the price moves to a likely massive accumulation of stop orders and reverses. After some time, in a growing market, the illusion may arise that stop orders should not be placed. After all, quotes will go up anyway. Instead of closing a losing trade, you need to add more funds to maintain the margin requirements. For some time, this approach will be profitable. An event will happenwhen it becomes clear that this is not a manipulation, but a real bear market, it is too late. Losses have reached a critical value and cannot be compensated.

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