We want all our visitors to appreciate fully what leverage is and how it can benefit you in investing.
So we have outlined below the formula and application of leverage to Forex and spot metals trading.
The mathematical equation of leverage, force times distance was developed by Archimedes over 2300 years ago. Probably the most brilliant man who ever lived said “Give me a place to stand and I will move the earth.” This statement was made based on his understanding of the incredible power of leverage.
His equation means that a small amount of force applied over a long distance is the same as a large amount of force applied over a small distance.
Try thinking of leverage like this, a small investment (force) over a long time (distance) can make as much money as a large investment (force) over a short time (distance).
For those of you who are not already rich and do not want to wait 20 years for a big return there is an
If we borrow money with only part of the total as collateral from our business partners, we can borrow a large amount for very little cost and then invest it immediately in the spot market to make big returns in a short time.
This allows us to use Archimedes equation to our advantage when trading currency, gold and silver. We are basically using a big stick to do more with small amounts of money over a short period of time.
In this example, to make a profit on the Euro, say we have 200:1 leverage. So we invest $1,000 which leverages us $200,000. We then buy Euros at the current rate of exchange on the Forex market and wait until the Euro gains 1 penny in exchange for the U.S. dollar.
This often occurs in less than an hour.
Once it does, we just buy back our U.S. dollars.
The profit is only one penny per dollar traded but because we leveraged $200,000 we made 200,000 pennies. A penny being 1% of a dollar we end up making $2,000 on our initial investment of $1,000 in an hour!
Perhaps the best part of this is we get our initial $1,000 back and don’t even pay any interest on what we borrowed!
That is the power of leverage when applied to investing in Forex.