In the financial markets, traders are constantly exposed to high tension between desirable gains and inherent risks. Each tool in their toolbox serves to navigate this tension in the most efficient way possible. This is equally true for advanced tools like robo advisors and more basic and accessible ones like position size calculators. In this article, the experts at Octa, a global broker since 2011, outline the nature and pros and cons of leverage, one of the most powerful—albeit double-edged—tools available to traders.
Pros and cons of leverage
Leverage is a popular brokerage function that allows traders to control sizeable positions with relatively small capital in their accounts. Through leverage, the broker ‘lends’ traders additional funds for their market operations, enabling them to enter larger trades than they could otherwise afford.
One critical roadblock to entering the financial markets is the high entry capital threshold, and leverage makes it more accessible. Increasing your account’s trading power manifold without additional deposits is a valuable opportunity that should be seriously considered.
However, this tool has its downside. When using leverage, failing to predict market fluctuations will result in proportionately larger losses compared to trading with your own funds. Before engaging with leverage trading, those new to financial markets should become proficient in calculating leveraged position sizes and inherent risks.
Practical implications of using leverage
Let’s illustrate how leverage works with an example. Suppose you have 1,000 USD in your account and trade with 1:10 leverage. In this case, the tradable power of your account amounts to 10,000 USD. If you invest your entire equity in a single position, and its value increases by 1%, you will make a profit of 100 USD or 10% of your initial equity amount. Conversely, you’ll lose the same sum if your asset’s value goes down by 1%.
In Forex, brokers usually offer a wider variety of leverage options compared to stocks, sometimes reaching as high as 1:1000. While ambitious leverage options make trading in currency pairs appealing to those willing to start small and quickly increase their capital, this opportunity should be approached with caution, since handling high-risk trading requires extensive experience and expertise.
Leverage trading with Octa broker
As a global broker complying with international standards of transaction security and information disclosure, Octa consistently connects traders to the financial markets while clearly communicating the conditions and risks inherent to trading across all channels. The terms and conditions of Octa’s trading platform fully describe all details of financial transactions.
This penchant for transparency is also reflected in the broker’s strong ambition to promote financial knowledge among traders and drive knowledgeable and deliberate decision-making. With that in mind, Octa provides comprehensive educational materials that help traders learn—among other things—about opportunities and risks leverage offers.
Conclusion
When done via an experienced and reliable broker, leverage trading is a legitimate and transparent opportunity to accelerate the trading journey. Naturally, it has its drawback: the higher the leverage, the greater the risk of a significant loss. To use this powerful boost to your advantage, you need a keen understanding of the financial markets’ mechanics and the ability to take calculated risks.
About Octa:
Octa is an international broker that has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and a variety of services used by clients from 180 countries who have opened more than 52 million trading accounts. To help its clients reach their investment goals, Octa offers free educational webinars, articles, and analytical tools.
The company is involved in a comprehensive network of charitable and humanitarian initiatives, including the improvement of educational infrastructure and short-notice relief projects supporting local communities.
Since its foundation, Octa has won more than 70 awards, including the ‘Best Forex Broker 2023’ award from AllForexRating and the ‘Best Mobile Trading Platform 2024’ award from Global Brand Magazine.
