Have you ever wondered how you can trading cryptocurrencies by controlling much larger positions than the funds you have? Well, the lever is the solution. This financial tool allows you to maximize your earnings, but it also comes with important risks. In this article, we will explore what the lever is, how it works and for whom it is suitable.
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What is the lever
The lever is a financial strategy that pauses you to trade much larger amounts than the capital you have. Basically, borrow capital from the broker or trading platform you use, which allows you to open a larger position than you could with your own funds.
The lever allows you to make a transaction by submitting a margin as a guarantee. For example, a 1:10 lever allows you to make transactions 10 times larger than the amount deposited (margin). If you have 500 RON in your account and you want to trade Bitcoin using a 1:10 lever, the platform will allow you to control a position of 5,000 RON.
The use of the lever can amplify both the winnings and the losses, which makes it a "two -edged sword". This is why it is essential to fully understand what the lever is and how it works, before using it.
What are the functions of the lever
As we have seen, the Levier effect is a strong financial tool, which allows investors to control a greater amount of capital than the one they actually have. The lever performs a number of essential functions in trading.
Amplification of profit potential
One of the biggest advantages of the lever effect is the ability to amplify the profit potential. With a small comparative investment, investors can generate earnings that would be impossible without this strategy.
Example:
Suppose that an initial investment without lever effect brings a 10%profit. If the basic investment is 1,000 RON, the final profit will be 1,100 RON (profit of 100 RON). Instead, using the effect of Levier and having access to a total investment of 5,000 RON, the 10% profit will bring 5,500 RON (winning 500 RON).
It is important, however, to understand the risks. If the market does not evolve as you expect, the lever effect can amplify your losses.
Access to markets with low capital
To trade on markets such as forex or goods, you usually need large amounts of money. The lever allows you to participate in these transactions, even if you have a low capital.
How does this work?
- Investors with only a few thousand dollars can access markets that would otherwise require tens of thousands of dollars.
- Brokers often provide lever effect according to the needs of the investor, increasing the chance to participate in global transactions.
This makes investments more accessible, especially for those at the beginning of the road.
Increasing reaction speed to opportunities
On financial markets, speed is essential. Rapid price changes can open short windows to get significant earnings. With the effect of lever, investors can react faster and with more strength to these opportunities.
Key Advantages:
- Greater ability to close or open positions without waiting for the equity to increase.
- Getting faster the liquidity needed to invest in the new market opportunities.
More effective use of capital
Another significant benefit of the lever effect is that investors can diversify their portfolio without needing more personal capital. Instead of blocking the entire amount in an asset or one transaction, the lever effect gives them the opportunity to invest in multiple assets simultaneously.
How does diversification work?
- The divided investments reduce the risk associated with a single asset.
- The possibility of exploring multiple markets (actions, currencies, goods) improves the general balance of the portfolio.
For example, an investor can use the effect of Levier to invest in actions from a certain economic sector, while exploring the real estate market or cryptocurrencies.
The lever effect is a valuable tool for increasing winnings and diversifying investments. However, success depends on the complete understanding of the associated risks. Investors who are informed and use the effect of Levier carefully can transform this strategy into a significant advantage.
The risks of the lever effect in investment
The effect of lever can be, for many investors, an attractive tool. The possibility of multiplying the winnings using only part of its own capital may seem a unique opportunity. However, like any other financial instrument, the lever comes with significant risks that should not be ignored. Here are the main risks associated with using the lever effect in investment and what you need to know to protect you.
Amplification of losses
Just as the effect of lever can multiply the winnings, it can amplify the losses. Imagine investing in an action using a 10x lever effect. A decrease in the price price by only 10% can lead to the total loss of the invested capital. Therefore, investors who use the lever effect must be prepared for scenarios in which their assets can perform under expectations.
Example
If you invest 1,000 RON of your money with a 10x lever, you have the equivalent exposure of an investment of 10,000 RON. A small negative fluctuation, only 5%, can mean a loss of 500 RON, half of the initial contribution.
The risk of "margin call"
When you trading with Levier, strict rules intervene. If the market moves against you, the broker may ask to submit additional funds to cover your position. This is called "margin call". If you cannot respond quickly, the broker has the right to automatically close the positions to limit the losses-this often happens at an unfavorable moment.
Recommendation:
To avoid the "margin call", make sure you always have a solid capital reserve for unforeseen situations.
Market volatility
The financial markets are extremely volatile, and the lever effect amplifies each small price movement. In periods of economic instability, the prices of assets can oscillate dramatically, which increases the risk of losses in the case of lever transactions. A simple unexpected press statement or the tweet of a personality can cause price decreases that, combined with the effect of lever lead to huge losses in a very short time.
Additional costs
Levier effect trading may seem accessible at first sight, but involves a number of additional costs, such as:
- Interest for borrowed capital
- Trading commissions
- Larger spreads
These additional costs reduce the profitability of transactions and can reduce the earnings, especially for those who are not attentive to the contractual details.
Advice:
Carefully analyze the broker's commissions structure and check if you use a lever that justifies these costs.
The risk of over-indebtedness
Another major danger of the lever effect is excessive use. When investors use too much borrowed capital, they can reach a difficult over-station situation, especially in the case of sudden market decreases. To limit this risk, some brokers offer "negative balance protection", which covers losses that exceed the initial capital. However, not all brokers offer this protection
Practical example:
Imagine that you have opened a large position with a cryptocurrency. Although you set a stop-bloss, the price drops so quickly that the order is executed at a much lower price. Under these conditions, the losses exceed your initial capital, and now you owe money to the broker.
Lack of experience and knowledge
Managing the lever effect requires a high level of understanding of the financial market, as well as clear knowledge. Experienced investors can fall quickly into the trap of overestimation of potential earnings and underestimating risk.
Recommendation:
Start experiencing with minimal exposure and low lever to gradually increase your confidence and knowledge in trading.
Emotional risks
Finally, we cannot ignore the impact that investments with Levier can have on the psychic. Panic selling or greed decisions can lead to expensive mistakes. The volatility of the market, combined with the effect of lever, amplifies stress and can prevent rational decisions.
Practical advice:
Establishes clear rules before trading, such as loss thresholds (stop-loss) or clear profit targets, and respect regardless of emotions.
How to use the success of lever successfully
The lever effect can be a valuable tool when used with care and good risk management. Here are some basic rules to use it with responsibility:
- Inform yourself before you start; Financial education is the key to success.
- After you understand what the lever is and how it works, use a small lever effect, especially if you are a beginner.
- Constantly monitor your positions and impose clear limits for losses and winnings.
If you want to deepen the subject of the risks associated with Levier, especially in the Alternative Investment Fund Sector (AIF), I invite you to consult the final guide published by ESMA: "ESMA Publishes Final Guidance to Address Leverage Risk in the AIF sector."
Lover: Secure strategies for beginners
If you are thinking of venturing in the crypto trading with a lever and you are a beginner, here are three strategies that may be useful to you:
Start with a small lever
For beginners, it is recommended to use a reduced lever, such as 1: 2 or 1: 5. Why? Because a smaller lever gives you enough maneuver margin to understand the market and its mechanisms, without exposing yourself to significant risks.
A reduced lever allows:
- Practicing the trading strategy without risking major losses.
- Constructing trust step by step in using this financial instrument.
- Limiting fast losses, especially in the case of sudden market movements.
Attention to risk
Although the use of the lever can generate considerable profits, there is an important risk of fast losses. Market movements are amplified in proportion to the lever used. So, until you get acquainted with the dynamics of trading, keep things as simple and controllable.
Educate yourself thoroughly
Knowledge means power, especially when it comes to lever trading.
It is crucial to understand:
- What is the lever and its technical mechanisms.
- The risks involved, including the liquidation of positions or the maintenance margin.
- Risk management strategies, which can protect you in the case of an adverse market.
Practice with a demo account
One of the best ways to learn is through practice. Most trading platforms offer demo accounts that allow you to simulate transactions using Levier, without putting real money. This is a safe and effective way to learn how the market reacts and how to manage positions.
Invest time in reading educational materials, watching webinars or taking courses that explain in detail the bases of the lever.
Manages the risk very carefully
Another essential aspect of lever trading is risk management. You need a well thought out plan to protect your investments and limit your losses.
Uses stop-loss order
Stop-Loss orders are essential tools to protect your positions. These allow the platform to automatically close your position if the market moves against you, preventing major losses.
Don't invest more than you allow yourself to lose
A golden rule in trading is to never invest more than you can afford to lose. The volatility of the market can lead to rapid losses, and the excessive use of the lever without having a clear knowledge of what the lever is, it can amplify this risk.
Constantly monitors the maintenance margin
The maintenance margin is the minimum amount you need to have in order to avoid liquidation of open positions. If your margin drops below this level, the platform can automatically close your positions, which can be disadvantageous.
Maintains a transaction journal
Monitoring your transactions is an excellent way to learn from mistakes and improve strategy over time. Note all the essential details, including the reasons for which you have opened a certain position, the results and lessons learned.
Key aspects to be remembered
- What is the lever: a financial tool that allows you to trade larger amounts of money than those you have in your account.
- What is the margin: the margin refers to the amount of money that an investor must deposit as a guarantee in order to open a position with Levier.
- The purpose of the lever is to help you increase your earnings resulting from transactions, using more capital than you have available. Attention, the lever does not amplify only the winnings but also the losses, so that it is essential to be used with caution.
- Before using the effect of lever, it is essential to fully understand what the lever is, the risks involved and the risk management strategies.
- Levier limits may vary depending on the broker, the financial instrument and the local regulations.
- Be aware that Crypto markets are open non-stop, and volatility can be very high, including at night.
Is the right lever for you?
The lever is an advanced strategy, suitable for investors who:
- I understand the default risks and understood what the lever is
- Are willing to monitor the market continuously.
- Have a clear risk management strategy.
If you are at the beginning of the road or you have low risk tolerance, it may be better to practice lever without lever before you venture.
If you want to know more about cryptocurrencies, you will find a number of resources with valuable information on the Abarai blog . We recommend that you read:
