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Impact of Leverage on Trading Results | gt.io
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Date:
02nd Jul 2020
Author:
gt.io

Impact of Leverage on Trading Results

The pandemic has been a colossal tragedy on a global scale. However, it could prove to be the biggest opportunity for crypto asset trading. Amid fears of rising Covid-19 infections and a macroeconomic storm brewing worldwide, the price of bitcoin (BTC) has managed to hold ground. As a deflationary asset, BTC has proved to be a major hedge against declining interest rates in fiat currencies and unprecedented stimulus measures injected by governments increasing risks of hyperinflation. BTC price is up 30% this year, and is expected to surge to a new all-time high later in 2020.

Price volatility in crypto assets together with the benefit of leverage can make them worthy investments. Just like leveraged forex trading, traders can open margin accounts to trade BTC/USD to increase their exposure in the market, without tying up their own capital. However, leverage is risky and can lead to magnified losses in case of sudden market reversals too. This is why risk management tools are critical as well.

Let’s understand the benefit of leverage through this example.
 
Leveraged trading in forex and crypto assets includes opening a margin account, where the trader puts up only a portion of capital required to open a trade. The rest of the capital is offered by the broker. So, with a small initial capital outlay, traders have greater exposure to the markets.

Let’s suppose a trader wants to assume a long position in BTC/USD pair. To buy 10 bitcoins at the current price of $9,592. To open a position at a traditional exchange the trader will have to pay 10 x $9,592, for a position of $95,920. If price of BTC goes up by 5%, the 10 BTC coins are now worth $10,552 each.

At this point, if the trader chooses to sell they will make a profit of $9,592 from the original investment of $95,920.

Now suppose the trader opens this position with a leverage of 1:100. This means they will have to pay only 1% of this position, which is $959 to open the trade. When the price rises by 5%, they make the same profit but at a considerable lesser cost.

However, do keep in mind that while trading with leverage increases how much you could make, it does also increase the risks of how much you could lose.
 
Regulated forex brokers with high leverage options can provide multiple trading benefits:
  • Magnified profits with a fraction of trading capital
  • Gearing benefits; which means that leverage can free up capital to be used in other investments
  • Traders can speculate on rapidly changing crypto prices and increase profit potential
When choosing a Forex broker to trade on margin, there’s one key thing to pay attention to.  While they might provide high leverage such as 800:1, often this is offered on tiered levels. For instance, leverage of 800:1 is available only for trading volume exceeding $20,000, in which case, the actual leverage being offered becomes quite less once it is averaged down.

gt.io offers 500:1 leverage for up to $ 1 million margin; not just for a few pairs, but for positions in over 100 crypto & FX pairs from one single platform. Open a gt.io crypto trading account today, to benefit from the lowest spreads and highly competitive bonuses.