Invest Responsibly – Understanding the risks involved

Leverage multiplies traders’ buying power, allowing investors to control a larger investment than their capital, potentially increasing their returns while only investing a percentage of the overall value of the asset in question.

However, if you don’t use leverage wisely, it is possible to lose the entire Equity in a very short space of time– and you may not even notice it!

Therefore, leverage is a double-edged sword, and you need to consider how much risk you are willing to take.

The leverage available to you may vary depending on your Jurisdiction, please refer the Axes ‘’Leverage Information’’ for details.

Leverage is often described as being ‘’borrowed’’ funds from the broker, however, this is not technically accurate, because the broker does not add funds to your account, instead, the funds required to place each trade is reduced by the level of leverage you set.

For example, if you trade 1 lot of EURUSD, (worth €100,000), with leverage of 1:1 (no leverage), you will need to physically have 100k euros in your account to place this trade.

If you have leverage, let’s say of 1:10, then €10,000 will be required to place the same trade, and so on…

Let’s go through some examples to help you understand how it is implemented in practice.

Let’s look at two possible scenarios.

Scenario A: with an initial investment of €1000 and leverage of 1:100 (for each euro, you have a buying power of 100), you can open a position of €100,000. Let’s say you ‘’Sell’’ EUR/USD, and the price chart moves down by 100 pips, this means that your profit will be $1000*

*Depending on the ‘’Term’’ currency of the pair

Scenario B: With an initial investment of €1000, you decide to open a ‘’Buy’’ position of €100,000 on EUR/USD. However, instead of increasing, the chart drops 100 pips. It this case, your deposit of €1000 may be lost.

During volatile markets and when using excessive leverage, it is possible for your deposit to disappear almost instantly. This is why it is so important to understand leverage and risk, and its relationship with margin and free margin, which we will discuss in the next lesson.

It is important to understand that using leverage not only magnifies potential profit or loss, but also impacts any costs associated with the trade.

For example, let’s say the spread to trade on a certain product is 0.1%, with the price currently at $1000.

A client with a $1000 deposit and who trades using no leverage (1:1), will incur a spread of $1, which represents 0.1% of the deposited capital. If the client instead traded, for example, using a leverage of 1:10, the spread would be $10 or 1% of the deposited capital.

The same applies to rollover fees, commissions or any other trading costs.

The above is just a basic example, to illustrate how leverage has a higher impact on your invested capital, as this is an important concept to understand.

Let’s recap the important points from this lesson:

• ‘Lots’ are used to represent the trade size in Units
• In FX, 1 lot = 100,000 of the base currency of the traded pair & the minimum trade size is 0.01 (micro lot)
• Leverage multiplies your buying power, allowing you to trade a larger trade value than your deposit.
• Double-edged sword- The higher the leverage, the more risk you are taking, so leverage should be used with care