What Is Leverage In Trading?

Author: nicolas tang

leverage in trading

Let’s have a look at the basics

Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.

How miners create coins and confirm transactions?

Cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the complete history of all transactions and of the balance of every account.

A transaction is a file that says, “Calvin gives X Bitcoin to Adam“ and Calvin’s prived key signed it. It is basic public-key cryptography. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p technology.

Almost immediately the whole network knows the transaction almost immediately. But only after a specific amount of time it gets confirmed. Confirmation is a critical concept in cryptocurrencies. It can be said that cryptocurrencies are all about confirmation.

If a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set and it can no longer forgeable, nor can it be reversed. It becomes part of an immutable record of historical transactions called blockchain.

What is Leverage Trading?

Leverage trading is a system that allows the trader to open positions much larger than his own capital. The trader needs only to invest a certain percentage of the position. The ratio between the position value and the investment needed is referred by the name of Leverage, and Margin is the percentage of the position needed.

Why trade with Leverage?

There are several advantages to trading with leverage:

Minimizes the capital the traders invest. Instead of paying the full price for an instrument, the trader can pay only a small portion of it.

Let’s see an example: if a position’s value at the time of opening is $3,000, instead of paying the full amount, he can employ leverage of 400:1. This means that every $400 in actual value he will be requested to invest $1 of his own capital; meaning that for this position he will need $7.5 to open it.

Also, some instruments are relatively cheap, meaning almost every trader can trade them easily. In another way, some are considered more valuable and based on their traded frequency and other factors are more costly. Instead of investing large amounts in order to take part in their market, it is possible to use leverage and enjoy the shifts in the price of valuable instruments.

Although leverage trading gives the advantage to traders to invest less capital, it also has a fail risk. As it is possible to gain much further than his initial investment, losses can happen in the same way. It is crucial to keep track of opened positions and apply stop loss and other market orders in order to prevent large scale losses. For this reason no matter how expert you are in Leverage trading. It is always best to use a trustworthy service provider like Phemex in order to make your trading safer and more accurate.

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