Leverage-Handel Krisen-Ausloser Binare Optionen & Leverage 2020

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Definition of leverage

Definition of leverage (Entry 2 of 2)

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Synonyms for leverage

Examples of leverage in a Sentence

These example sentences are selected automatically from various online news sources to reflect current usage of the word ‚leverage.‘ Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of leverage

1830, in the meaning defined at sense 1

1957, in the meaning defined at sense 1

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Time Traveler for leverage

The first known use of leverage was in 1830

Dictionary Entries near leverage

Statistics for leverage

Cite this Entry

“Leverage.” Merriam-Webster.com Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/leverage. Accessed 11 Apr. 2020.

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Financial Definition of leverage

Leverage is any technique that amplifies investor profits or losses. It’s most commonly used to describe the use of borrowed money to magnify profit potential (financial leverage), but it can also describe the use of fixed assets to achieve the same goal (operating leverage).

Let’s look at selected balance sheet and income statement information for Company XYZ.

Company XYZ has invented a new product that will revolutionize the widget market, but it needs to build a new $1,000,000 factory. It must choose between using equity or long-term debt to build the factory. We can see the impact on profits of both decisions.

Scenario A: Raise $1,000,000 by issuing new stock

XYZ is able to raise $1,000,000 by issuing 500,000 new shares at $2 per share. It builds its new factory and immediately sees revenues double and operating expenses increase by $300,000 (about 43%). Let’s look at the impact on its financial statements:

Profit per share has almost tripled. That’s pretty good.

Scenario B: Use financial leverage, raise $1,000,000 in debt

Let’s see what happens if XYZ chooses to use $1,000,000 in debt to finance its new factory. Assume it can borrow at 5% per year.

By using leverage, Company XYZ increases the profit available to shareholders.

Operating Leverage
If we go back to Company XYZ, we can examine the effects of operating leverage on profits. Let’s say the company is trying to choose between building their factory or outsourcing production to a third-party manufacturer. If they outsource production, they will pay $0.75 for each $1 widget they sell.

Scenario C: Outsource production instead of investing in additional fixed assets (the new factory)

As in the previous example, assume the company is able to double revenues when the new widget hits the market.

Comparing the results side-by-side, we can see the effects of leverage on profit potential:

Leverage it is not without risk. It requires a commitment to keep up with the principal and interest payments on the debt. If it’s unable to do so, it will be forced into bankruptcy and shareholders will lose everything.

Too much leverage can be bad, but there’s no hard and fast rule as to how much is too much. No matter what its use, leverage can be a powerful tool when used responsibly. Savvy investors and companies use leverage to expand, hedge and speculate, but the overly aggressive can easily get in over their heads by losing money or going into bankruptcy.

For investors considering companies with debt, one of the most popular evaluations of a company’s leverage is the debt-to-equity ratio (D/E). The interest coverage ratio, also known as times interest earned, is also a measure of how well a company can meet its interest-payment obligations. In general, these ratios suggest whether a company is „too safe“ and is neglecting opportunities to magnify earnings through leverage or is overleveraged and at serious risk of default or bankruptcy.

Breaking: ESMA Prepares to Prohibit Binary Options, Cut Forex Leverage to 1:30 or Lower

The supranational European regulator has issued a statement outlining the measures that it is considering.

The European Securities Markets Authority (ESMA) is preparing to deploy a new set of regulations on the retail trading industry. The move has been widely expected for about a year. The FCA was the first major regulator to signal that changes are coming to the regulatory framework that governs the business of retail brokers.

According to an interim update on the measures, ESMA is considering the heaviest of measures on binary options. The regulator says that it is considering product intervention powers in order to ban the offering altogether.

As to CFDs and forex brokerages, the supranational European regulator is preparing to limit the marketing of such products to retail investors. While some national authorities have already taken measures on a local level, all European regulators will need to adhere to the decision of the ESMA.

Leverage Could be Cut in Tiers to Between 1:30 and 1:5

Under the product intervention powers that the European authority will receive on the 3rd of January 2020 under the MiFIR framework, several limitations on brokerages are possible.

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According to the ESMA statement, it is considering cutting leverage limits to between 1:30 and 1:5. The precise levels will be contingent on the volatility of the underlying asset. In addition, the brokers might need to implement a margin close-out rule, negative balance protection and a standardized risk warning.

Brokers are also facing a restriction on the trading benefits that they offer. ESMA says that it will open a “brief public consultation” in January 2020 in order to determine which measures should be implemented and which not.

Any product intervention measures that ESMA undertakes will have an initial validity of three months, but the action is perpetually renewable. Unless the regulator faces a massive backlash from consumers, there is little likelihood of any measures being reversed once taken. The full statement from ESMA is available for reading below.

Admiral Markets Group consists of the following firms:

Admiral Markets Cyprus Ltd

Admiral Markets Pty Ltd

Admiral Markets UK Ltd

Reading time: 13 minutes

If you are a rookie trader, you may find yourself asking questions such as ‚what is leverage in Forex trading?‘ and ‚how can it be useful?‘ This article will provide you with answers to these types of questions, together with, a detailed overview of Forex leveraging, its advantages and disadvantages, and a list of possible applications and restrictions.

What is Leverage?

In general, leverage enables you to influence your environment in a way that multiplies the outcome of your efforts without increasing your resources.

In the world of trading, it means you can access a larger portion of the market with a smaller deposit than you would be able to via traditional investing. This gives you the advantage of getting greater returns for a small up-front investment, though it is important to note that traders can be at risk of higher losses when using leverage. In finance, it is when you borrow money, to invest and make more money due to your increased buying power. Once you return what you borrowed, you are still left with more money than if you had just invested your own capital.

Let’s look at it in more detail for the finance, Forex, and trading world.

What is Financial Leverage?

Leverage in finance pertains to the use of debt to buy assets. This is done in order to avoid using too much equity. The ratio of this debt to equity is the formula for leverage (debt/equity ratio) whereby the greater the proportion of debt, the higher the amount of leverage. If a company, investment or property is termed as „highly leveraged“ it means that it has a greater proportion of debt than equity. When leveraged debt is used in such a way that the return generated is greater than the interest associated with it, then an investor is in a favourable position.

However, an excessive amount of economic leverage it is always risky, given that it is always possible to fail to repay it.

(Note that the leverage shown in Trades 2 and 3 is available for Professional clients only. A Professional client is a client who possesses the experience, knowledge and expertise to make their own investment decisions and properly assess the risks that these incur. In order to be considered to be Professional client, the client must comply with MiFID ll 2020/65/EU Annex ll requirements.)

Financial leverage is quite different from operating leverage. Operating leverage of a business entity is calculated as a sum total of the amount of fixed costs it bears, whereby the higher the amount of fixed costs, the higher the operating leverage will be. Combine the two and we get the total leverage. So, what does leveraging mean for a business? It is the use of external funds for expansion, startup or asset acquisition. Businesses can also use leveraged equity to raise funds from existing investors.

Why Use Financial Leverage?

Leverage is used for these basic purposes:

  1. To expand a firm’s or an individual’s asset base and generate returns on risk capital. This means that there is an increase in ROE and Earnings Per Share.
  2. To increase the potential of earnings.
  3. For favourable tax treatment, since in many countries, the interest expense is tax deductible. So, the net cost to the borrower is reduced.

Leveraged Equity

When the cost of capital debt is low, leveraged equity can increase returns for shareholders. When you own stock in a company that has a significant amount of debt (financial leverage), you have leveraged equity. It entails the same amount of risk as leveraged debt. Therefore, the stockholder experiences the same benefits and costs as using debt.

Trading Leverage

Trading leverage or leveraged trading allows you to control much larger amounts in a trade, with a minimal deposit in your account. Leveraged trading is also known as margin trading. You can open up a small account with a brokerage, and then essentially borrow money from the broker to open a large position. This allows traders to magnify the amount of profits earned.

Remember, however, that this also magnifies the potential losses. Stock market leverage includes trading stocks with only a small amount of trading capital. This is also seen in forex leveraging, wherein traders are allowed to open positions on currency prices larger than what they can afford with their account balance alone.

It should be remembered that leverage does not alter the profit potential of a trade; but instead, reduces the amount of equity that you use. Leveraged trading is also considered a double-edged sword, since accounts with higher leverage get affected by large price swings, increasing the chances of triggering a stop-loss. Therefore, it is essential to exercise risk management when it comes to leveraged instruments.

What is Leverage in Forex?

Financial leverage is essentially an account boost for Forex traders. With the help of forex leveraging, a trader can open orders as large as 1,000 times greater than their own capital. In other words, leverage is a way for traders to gain access to much larger volumes than they would initially be able to trade with. More and more traders are deciding to move into the FX (Forex, also known as the Foreign Exchange Market) market every day.

Trading currencies online is an exciting experience, and is accessible for many traders, and while each person will have their own reasons for trading in this market, the level of financial leverage available remains one of the most popular reasons for traders choosing to trade on the FX market.

When visiting sites that are dedicated to trading, it’s possible that you’re going to see a lot of flashy banners offering something like “ trade with 0.01 lots, ECN and 500:1 leverage“. While each of these terms may not be immediately clear to a beginner, the request to have Forex leverage explained seems to be the most common one.

Although we defined leverage earlier, let’s explore it in greater detail:

Many traders define leverage as a credit line that a broker provides to their client. This isn’t exactly true, as leverage does not have the features that are issued together with credit. First of all, when you are trading with leverage you are not expected to pay any credit back. You are simply obliged to close your position, or keep it open before it is closed by the margin call. In other words, there is no particular deadline for settling your leverage boost provided by the broker.

In addition, there is also no interest on leverage, instead, FX Swaps are usually what it takes to transfer your position overnight. However, unlike regular loans, the swap payments can also be profitable for a trader. To sum up, leverage is a tool that increases the size of the maximum position that can be opened by a trader. Now we have a better understanding of Forex trading leverage, let’s see how it works with an example.

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How Does Forex Leverage Work?

Let’s say a trader has 1,000 USD on their trading account. A regular lot of ‚1‘ on MetaTrader 4 is equal to 100,000 currency units. As it is possible to trade mini and even micro lots with Admiral Markets, a deposit this size would allow a trader to open micro lots (0.01 of a single lot or 1,000 currency units) with no leverage put in place. However, as a trader would usually be looking for around 2% return per trade, it could only be equal to 20 USD.

This is why many traders decide to employ gearing, also known as financial leverage, in their trading – so that the size of the trading position and profits could be higher. Let’s assume a trader with 1,000 USD on their account balance wants to trade big and their broker is supplying a leverage of 1:500. This way a trader can open a position that is as large as 5 lots, when it is denominated in USD. In other words, 1,000 USD * 500 (the leverage), would equal a maximum size of 500,000 USD for the position. The trader can actually request their orders of 500 times the size of his deposit to be filled.

This way, if 1:500 leverage is used, a trader would be making 500 USD instead of 1 USD. It is of course important to state that a trader can lose the funds as quickly as it is possible to gain them. Now as we have understood the definition and a practical example of leverage, let’s take a more detailed look at its application, and find out what the best possible level of gearing in FX trading is. Admiral Markets offers varying leverages which are dependent on client status via Admiral Markets Pro terms.

For retail clients, leverages of up to 1:30 for currency pairs and 1:20 for indices are available. For professional clients, a maximum leverage of up to 1:500 is available for currency pairs, indices, energies and precious metals. Both retail and professional status come with their own unique benefits and trade-offs, so it’s a good idea to investigate them fully before trading. Find out today if you’re eligible for professional terms, so you can maximise your trading potential, and keep your leverage where you want it to be!

Which Leverage to Use in Forex

It is hard to determine the best level one should use, as it mainly depends on the trader’s strategy and the actual vision of upcoming market moves. As a rule of thumb, the longer you expect to keep your position open, the smaller the leverage should be. This would be logical, as long positions are usually opened when large market moves are expected. However, when you are looking for a long lasting position, you will want to avoid being ‚Stopped Out‘ due to market fluctuations.

In contrast, when a trader opens a position that is expected to last for a few minutes or even seconds, they are mainly aiming to extract the maximum amount of profit within a limited time. What is the best forex leveraging in this case? Usually such a person would be aiming to employ high, or in some cases, the highest possible leverage to assure the largest profit is realised, while trading small market fluctuations.

From this we can see that the Forex leverage ratio strongly depends on the strategy that is going to be used. To give you a better overview, scalpers and breakout traders try to use as high a leverage as possible, as they usually look for quick trades. Positional traders often trade with low leverage or none at all. A desired leverage for a positional trader usually starts at 5:1 and goes up to about 20:1.

When scalping, traders tend to employ a leverage that starts at 50:1 and may go as high as 500:1. Knowing the effect of leveraging and the optimal leverage Forex trading ratio is vital for a successful trading strategy, as you never want to overtrade, but you always want to be able to squeeze the maximum out of potentially profitable trades. Usually a trader is advised to experiment with leverage within their strategy for a while, in order to find the most suitable one.

To learn more about why lower leverage is good for retail traders and what is the success rate for high vs. low leverage, watch this free webinar here:

FX Broker Offers

Unlike futures and stock brokers that offer limited leverage or none at all, the offers from FX brokers are much more attractive for traders that are aiming to enjoy the maximum gearing size. It is hard to indicate the size of the leverage that a Forex trader should look for, yet most of the Forex broker leverages available start at 100:1 and tend to be an average of 200:1. There are also many brokers that can supply 1:500 leverage.

Also, in very rare cases it is possible to open an account with a broker that supplies 1,000:1, however, there aren’t many traders who would actually want to use gearing at this level.

How to Change Forex Leverage

Once you begin trading with a certain FX broker, you may want to modify the leverage available to you. This depends on the broker. With Admiral Markets you can use an industry standardised procedure that includes authenticating to the Trader’s Room, selecting your account, and changing the leverage available. This action takes immediate effect, so be careful if you have open positions when you attempt to reduce your leverage.

Another important aspect to remember is that leverage is tied to the account deposit level, so sometimes when depositing extra funds into your account, currency trading leverage can be reduced. For example, a broker may supply a leverage of 1:500 on the deposits below 1,000 USD, and a leverage of 1:200 on the deposits between 1,000 and 5,000 USD.

Once a trader has 950 USD, and opens a 3 lot position on EURUSD, they may decide to deposit a bit more to sustain a required margin, yet when the deposit occurs, the leverage will be changed, and the position might close when the Stop Out level has been reached.

Conclusion

We hope that this article has been useful to you, and that by now you have clearly understood the nature of gearing, how to calculate Forex leverage, and how it can be equally be useful or harmful to your trading strategy. It is important to state that leveraged Forex trading is quite a risky process, and your deposit can be lost quickly if you are trading using a large leverage. Do try to avoid any leveraged or highly leveraged trading before you have gained enough experience.

Trade With Admiral Markets

If you’re feeling inspired to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that Admiral Markets provides the ability to trade with Forex and CFDs on up to 80+ currencies, with the latest market updates and technical analysis provided for FREE! Click the banner below to open your live account today!

About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Order Leverage & Position Leverage – Efficient margin utilisation

On Delta Exchange, we distinguish between order leverage and position leverage. In this post I cover the motivation behind doing so and the benefits that it brings to a trader. I am going to demonstrate this using an example.

What is Position Leverage?

When you place an order and choose a leverage, you essentially decide how much capital you want to keep as margin. Let’s say that you place an order to buy Bitcoin futures with 10x leverage. If the position is for 1000$ notional, you’ll have to keep 100$ worth BTC as margin and this would mean that your liquidation price is roughly 10% away from your entry price. For this article, let’s assume that you prefer that your liquidation price is always 10% away from current price.

Now suppose BTC moves higher and your long position is profitable. Your position will have accrued some unrealised profits. Hence the money that you currently have claims to are: the margin that you had kept and unrealised profits. These unrealised profits would have reduced the effective leverage and the liquidation price of your position would be farther out from the current mark price. This effective leverage is what we call “Position Leverage”.

Let’s consider 2 scenarios now:

Scenario#1: Let’s say that because of your unrealised profits your current Position Leverage has become 5 x. Assume that you want to increase your position size as market moves higher. You also want that if your open orders are filled your liquidation price is 10% away from the mark price but if the market retraces instead, then your unrealised profits can support your position.

In a way you want to use your unrealised profits to margin for extra quantity if the open orders are filled but if they are not filled then you want to use unrealised profits to support your current position. You can do this by adding new orders at an order-leverage which is higher than 10x (your desired position leverage). Since this order is at higher leverage it will need less margin.

Your current position leverage is 5 x. Say you wish to double the size of your open position, you should put new open orders at 15 x leverage, which need less margin. When your orders are executed your new position leverage will come back to

10x. (I am assuming execution price of new orders is close to current price)

Having the flexibility to have order leverage and position leverage as different entities helps a trader reduce margin requirement for open orders w/o increasing the risk of the position. So you can gradually build a position w/o blocking too much money in margin.

Other exchanges also provide the option of changing leverage of an open position but they force traders to have same leverage for open positions and open orders. We see this as a drawback because if you want to increase your position in size, your new orders will be at same leverage as your position. If you want to add new orders at higher leverage, you’d have to move your entire position at higher leverage or higher risk.

Scenario #2: If you do not want to add to your position size, you can simply withdraw margin form your existing position and increase the position leverage back to the desired level. This money will get credited to your available balance immediately and you can use it to trade in other contracts.

I hope this posts clarifies the difference between order leverage and position leverage and how to use them for efficient capital management.

How do you like this feature? Do let me know in comments below.

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