Leverage refers to a mechanism that allows investors to conduct larger trades relative to their own capital. By using leverage, investors can trade with a larger amount of money by using a portion of their own funds as collateral. This enables them to aim for significant profits with a small amount of capital, but it is crucial to be aware that it also amplifies potential losses.

Let’s explain with a concrete example.

[Example]

Example of trading amount with 100,000 yen (margin):

With 25x leverage: 100,000 yen × 25 = 2,500,000 yen

With 100x leverage: 100,000 yen × 100 = 10,000,000 yen

With 400x leverage: 100,000 yen × 400 = 40,000,000 yen

For example, if a trader has 10,000 dollars of their own funds and the leverage ratio is 1:100, the trader can trade an amount equivalent to 1,000,000 dollars. In other words, they can trade 100 times their own capital. This means the trader can buy or sell currency worth 1,000,000 dollars with just 10,000 dollars of their own funds.

Consider a trader buying 10,000 dollars worth of EUR/USD currency pair. In a regular trade, the trader would use 10,000 dollars to purchase 10,000 dollars worth of currency. However, using leverage, the trader can use 10,000 dollars to buy currency worth 1,000,000 dollars. If the exchange rate moves favorably, the trader can earn substantial profits. Conversely, if the exchange rate moves unfavorably, losses can also be magnified, making risk management crucial. A leverage ratio of 1:20 means that only 5% of the total transaction amount is needed as margin.

Using excessive leverage can significantly expand profits and losses, making it very risky. This can lead to substantial losses and result in a stop-out, which is an automatic liquidation of positions. This happens because the collateral needed to maintain potential losses and prevent positions from being liquidated becomes a much smaller percentage of the position when using higher leverage.

Additionally, be aware that higher leverage increases the percentage impact of spreads and swap fees on investment capital. For example, if the spread of a financial product is 0.1%, and trading starts with 20x leverage, the spread cost percentage of the deposited margin becomes 2%.

Using leverage allows holding large positions with a small amount of capital, thereby increasing trading efficiency. However, leverage also increases risk, and for traders without sufficient knowledge or experience, it can magnify losses. Therefore, it is essential to trade carefully, with proper risk management and calculation of appropriate position sizes.