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Should Credit Leverage Be Used and How Does it Work?


Credit leverage is a service like altcoin signals, which is a loan in the form of money provided to the trader for a transaction. The size of the loan can exceed the amount of the trader’s deposit by 10, 20, 100 and more times. By analogy with the law of physics, leverage gives the trader an opportunity to make deals that he would not be able to make with his own funds alone.

Making transactions on the exchange with the use of leverage is called margin trading. It represents the conclusion of purchase and sale transactions with the use of borrowed funds pledged against a certain amount, which is called a margin. In other words, to use the service of leverage, it is necessary to have a minimum amount of deposit (set by broker), which will be a pledge.

Leverage size is the ratio of a trader’s own funds to the loan amount (1:100, 1:1000). For example, if this ratio is 1:500, it means that the broker is lending the sum that is 500 times more than the investor’s deposit.

The word “leverage” scares many people, but in fact there is nothing wrong with this concept. Leverage is not a loan in the usual sense of the word, no interest is charged for its use. The funds are not credited to the trader’s account, they are used in deals at once. If a deal is losing, then when the trader’s personal funds decrease to a certain critical figure (20-30%, and sometimes 50% of the original amount, depending on the exchange conditions) it is closed. When transferring the positions of the transaction to the next day the account is charged a fee in the amount of the difference between the interest rates on the credit and the deposit – the so-called swap, which can be considered an analogue of the fee for the use of leverage.



Credit Leverage: Pros and Cons

For many traders who do not have their own significant capital, leverage has become a kind of lifesaver. After all, with its help, you can get access to serious deals and earn good money.

At first glance, this financial tool has only advantages:

  • Allows you to make large deals and make good profits
  • Provides beginners the opportunity to increase their own deposit by several times in a short period of time
  • Allows you to make bets that exceed your financial capabilities

But there are pitfalls in using borrowed funds:

  • High potential returns are directly proportional to equally high risks
  • Perceiving a credit as real money, the trader does not learn how to manage the capital, but focuses only on the deal size

 

Conclusion

Thus, leverage – is a good financial tool for those who have already learned how to manage capital and have a low percentage of losing trades. In the hands of an inexperienced trader such a tool can lead to a complete loss of own funds.

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