CLASS 3 : WHAT IS LEVERAGE📈
In forex trading, leverage allows you to control a larger position than your actual capital would typically allow.
Think of it like using a loan to amplify your buying power. While leverage can magnify potential profits, it also significantly magnifies potential losses.
It's crucial to understand both sides of this coin before using leverage in forex trading.
HERE'S HOW LEVERAGE WORKS📈
Imagine you have $1,000 in your trading account.
With a 10:1 leverage ratio, your broker allows you to control a position worth $10,000.
This means you can buy or sell $10,000 of a currency pair, even though you only have $1,000 of your own money.
EXAMPLE📈
Let's say you go long on EUR/USD with $1,000 and 10:1 leverage, buying $10,000 worth of Euros.
If EUR/USD rises by 1%, your profit would be $100 (1% of $10,000).
This translates to a 10% gain on your initial $1,000, much higher with leverage.
However, the risks are amplified too:
If EUR/USD falls by 1%, your loss would be $100 (1% of $10,000).
This translates to a 100% loss on your initial $1,000, potentially wiping out your entire account.
WHAT IS HEDGING📈
Hedging is a risk management strategy used in finance to reduce the risk of adverse price movements in an asset. It involves taking an opposite position in a related asset so that if the price of the first asset falls, the gain from the second asset helps to offset the loss.
HEDGING EXAMPLE📈
▫️A trader holding stocks in a tech company (Asset A) might buy on a market index (Asset B) to hedge against a broader market downturn.
▫️A currency trader long on USD/JPY might short EUR/JPY to hedge against potential dollar weakness.
