One of the problems that traders are dealing with in the digital currency markets today is the lack of liquidity. A tool called leverage has been created to solve this problem; But what is leverage? It is a trading tool that is used to increase the efficiency and ease of buying and selling digital currencies. In this article, we are going to explain the question of what leverage is and teach the full leveraged trades.
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What is leverage?
The word Lorij in Persian language means lever of power, Lorij acts like a lever of power in transactions, so that digital currency traders can buy cryptocurrencies beyond their budget and capital. If we want to explain this issue with an example, suppose you intend to buy a digital currency worth $100; But this is out of your power and you only have 10 or 50 dollars of capital.
Using leverage or leverage gives you the ability to buy the desired amount of that currency and the exchange will pay the rest. If you intend to use this method, be sure to read the rules and conditions of each exchange for leverage transactions so that you do not suffer irreparable losses after buying the desired cryptocurrency and its fall. Leverage can be used in options, futures and margin transactions.
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In fact, the use of leveraged or leveraged transactions will bring significant profit to traders. If the currency that the traders have bought is in a rising and growing state, because they bought more of it before the growth, they can earn a good income from it when they sell it. Of course, if the purchased cryptocurrency falls or has a downward growth, your losses in this transaction will increase and sometimes lead to the loss of your capital.
For example, if you want to buy 100 Ethereum and its price is 500 dollars and you only have 250 dollars in your account, the exchange will lend you another 250 dollars, in this case your profit or loss when you sell this The currency will be 2 times.
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What are the advantages and disadvantages of leverage?
Advantages
Liquidity deficit compensation
By using this method, you will no longer have a lack of cash to buy a currency and you can easily buy the currency you want. This tool gives buyers the ability to make bigger deals with less capital.
Increase in profit
In this case, there is a possibility that you will increase your capital compared to before, for example, if you use leverage of 1:50 (one to fifty) to buy Ethereum, for every one percent increase in the price of Ethereum, you will get 50%. you profit The more successful trades you make, the more capital you earn. It should be noted that the interest charged by the exchange at the end of each contract is fixed and does not change.
Disadvantages
Loss of capital
If you do not have enough skills in the field of margining and leveraging, it will not bring you good results. Leveraged trading can be as profitable as it is risky.
High volatility
If you are a long-term investor, it is better not to go to Lorij; Because you intend to hold or keep your assets and sell them at the right time when the market has taken an upward trend. Holding on to falling assets will result in the loss of your assets and capital in general.
The capital is lost
Another thing that is important is that your principal capital may be completely lost. For example, if the digital currency you bought is falling and you used leverage to buy it, not only will keeping it cause you more loss; It also causes the loss of all your assets. In the best case, you should start selling it when you see such a situation, because whenever you prevent a loss, it is a profit.
What are the different uses of leverage?
Up to this part, you have understood what a lever is. Leverage also has applications outside the world of digital currencies, for example, you can use it to buy a house, invest in the financial markets, personal businesses.
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How does the lever work?
Leverage’s strategy is like this, the exchange compensates for your lack of money in buying currency and receives an interest from you in return. You will make a profit if the income after the sale is more than the amount of money you borrowed plus the interest on the money. For example, if you plan to trade with a leverage of 1:10 (one to ten) and an asset of $100, if you earn 20% profit from the transaction, in the end your total asset will be equal to $300.
It should be noted that some leverages are specific to certain currencies, for example, if you want to use 1:50 leverage, you should use the EURUSD pair, and if you want to use another pair such as USDJPY, you should change the leverage to 1:25. give In fact, how much profit you have earned will be multiplied by the amount of loan you are going to use, then it will be added to your property. To better understand this issue, a number of lubricants have been placed in the table below for you dear ones.
Read more: What is volatility?
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What is the way of carrying out Loverij transactions?
Trading in forex is done under the name of CFD. This is an agreement between the borrower and the lender, and the borrower is obligated to pay his debt to the CFD provider. Leverage or leverages have their own margins, for example, a leverage margin of 1:50 is equal to 2%, which means 2% of your profit is deducted as interest.
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The stages of leveraged trading in forex
In order to make a transaction with Leverage in Forex, it must be done according to the instructions that have been compiled for you below, and before that you must specify the volume of the transaction.
- Create an account in the broker
- Top up your account with $100 for initial credit
- Choose the desired leverage to make the transaction
In forex, currency trading is based on a series of factors called lots. Each lot is equal to 100,000 units of a currency. If a trader buys one lot of a currency, he has actually bought 100,000 units of that currency. For example, if the trader has 1000 dollars in his account, he should use 1:100 leverage to buy a lot (1000/1000).
What is the position of Short and Long in leverage?
There are two modes in the transactions that are created in the field of leverage, long-term position (Long) and short-term position (Short) are two positions that you can choose before forming your transaction. The long position is chosen by those traders who believe that the digital currency they are looking for is going to increase after a long time. But choosing short trades is the opposite of the long trend. Note that if the currency you are looking for is not in good condition, it is better to choose a short position so that you do not lose much if it falls.
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Conclusion
The Leverage tool is like a double-edged sword, its use can bring significant profits to traders, and on the other hand, it may cause the loss of all their assets. Therefore, having enough information in this field before using levers is the first word. Note that the conditions of leverage are different in each exchange, be sure to study it before doing this. In this article, we tried to explain to you, dear readers, what a lever is and how it works.
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