What is trading leverage?

Education

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What is a 'lot'?

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Lots are used to represent the trade volume in units.
Lots are used to represent the trade volume in units. One standard Lot on Forex is equal to 100,000 units of the base currency of the pair. So, for EUR/USD 1 lot is 100,000 euros, for USD/JPY 1 lot is 100,000 US Dollars.

Thanks to online brokers, mini and micro-lots are also available to traders.
The table below will help you to understand lot sizes:
For other assets, each ‘Lot’ represents a standard amount, for example, 1 lot of Gold is 100oz.
Standard Lot (1.0)
100,000 of base currency
Mini Lot (0.1)
10,000 of base currency
Micro Lot (0.01)
1,000 of base currency
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Leverage multiplies traders’ buying power, allowing investors to control a larger investment than their capital, potentially increasing their returns while only investing a percentage of the overall value of the asset in question.
However, if you don’t use leverage wisely, it is possible to lose the entire Equity in a very short space of time– and you may not even notice it!
Therefore, leverage is a double-edged sword, and you need to consider how much risk you are willing to take.. Leverage is often described as being ‘’borrowed’’ funds from the broker, however, this is not technically accurate, because the broker does not add funds to your account, instead, the funds required to place each trade is reduced by the level of leverage you set.

For example, if you trade 1 lot of EURUSD, (worth €100,000), with leverage of 1:1 (no leverage), you will need to physically have 100k euros in your account to place this trade

If you have leverage, let’s say of 1:10, then €10,000 will be required to place the same trade, and so on...
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Let’s go through some examples to help you understand how it is implemented in practice. Let's look at two possible scenarios.
With an initial investment of €1000 and leverage of 1:100 (for each euro, you have a buying power of 100), you can open a position of €100,000. Let’s say you ‘’Sell’’ EUR/USD, and the price chart moves down by 100 pips, this means that your profit will be $1000*

*Depending on the ‘’Term’’ currency of the pair
Scenario A
With an initial investment of €1000, you decide to open a ‘’Buy’’ position of €100,000 on EUR/USD. However, instead of increasing, the chart drops 100 pips. It this case, your deposit of €1000 may be lost.
Scenario B
For example, let’s say the spread to trade on a certain product is 0.1%, with the price currently at $1000.

A client with a $1000 deposit and who trades using no leverage (1:1), will incur a spread of $1, which represents 0.1% of the deposited capital. If the client instead traded, for example, using a leverage of 1:10, the spread would be $10 or 1% of the deposited capital.

The same applies to rollover fees, commissions or any other trading costs.

The above is just a basic example, to illustrate how leverage has a higher impact on your invested capital, as this is an important concept to understand.
During volatile markets and when using excessive leverage, it is possible for your deposit to disappear almost instantly. This is why it is so important to understand leverage and risk, and its relationship with margin and free margin, which we will discuss in the next lesson.
It is important to understand that using leverage not only magnifies potential profit or loss, but also impacts any costs associated with the trade.

Let’s recap the important points from this lesson:

‘Lots’ are used to represent the trade size in Units.
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In FX, 1 lot = 100,000 of the base currency of the traded pair & the minimum trade size is 0.01 (micro lot)Leverage multiplies your buying power, allowing you to trade a larger trade value than your deposit.Double-edged sword- The higher the leverage, the more risk you are taking, so leverage should be used with care
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Henderson Digital Assets is a subsidiary of Janus Henderson Horizon Fund regulated by Financial Conduct Authority (FCA) of the United Kingdom under registration number 144111. Both companies are part of Janus Henderson Investors Europe S.A. Regulated by Financial Sector Supervisory Commission of Luxembourg (CSSF) under registration number B22848.

CFDs, FX, Crypto and any other leveraged products are complex instruments and come with a high level of risk of losing money due to the leverage used in these products. You should consider whether you understand how any product you trade or invest in is suitable for you, and whether the risk involved in trading or investing into these products is acceptable. It is important that you understand that with trading and investing, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to trade and invest with Henderson Digital. If you are still unsure if investing is right for you, please seek independent advice.
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