What is leverage?

A lot of online vendors and brokers of securities offer their clients (the traders) leverage.

When you trade using leverage, you only carry out a portion of the trade using money from your trading account. The rest of the money you borrow from the vendor.

leverageExample: You purchase a Digital 100 option for €500 using €100 from your account and €400 that you borrowed from the binary option vendor. The payout for this option is 80%.

  • If the option expires in the money, you make a €400 profit + you don’t lose €500. You have no problem paying back €400 to the vendor.
  • If the option expires out of the money, you lose €500. You now owe the vendor €400 that must be paid back. If you don’t have enough money in your account to pay back, you have to make a deposit to cover your debt.

In this example, 1/5 of the trade size came from your own money and 4/5 were borrowed. In reality, many traders use much higher leverage levels than this. It is not uncommon for vendors and brokers online to offer leverage along the lines of 100:1 or even 200:1 – depending on what you want to invest in. A 100:1 ratio means that you are required to have just 1/100 (1%) of the total trade size available in cash in your account to carry out the trade. The rest, you can borrow from the vendor / brokers.

Using leverage when trading in digital 100 options

Using leverage to trade in digital 100 options is popular since you can build up your assets quicker than what would be possible if you were limited to investing only the money in your account. With the help of leverage, a small bankroll can be utilised to make substantial investments in digital 100 options.

The big downside is of course that you risk losing more money than you have. Using leverage to trade is the same as borrowing money to trade. You are trading on a credit. Instead of just losing all the money in your trading account if you hit a rough patch, you can end up with a debt to the creditor that must be paid back and that promptly.

Trading in Digital 100 options is inherently risky, since it is such a black-or-white instrument. When you invest in shares, “losing” might mean that you experience a 5% drop in share price. When you invest in Digital 100 options, a loss means losing 100% of the invested money. Because of this, many people will caution you against using leverage when trading in Digital 100 options.

Regardless of whether you decide to use leverage or not: Never risk more money than you can afford to lose. Don’t trick yourself into believing in “a sure thing”. Investing in Digital 100 options always means that you can lose the invested amount. It has also been shown in studies that the mere fact of knowing that losing the money would cause serious problems in ones personal life can impact trading decisions and make the trader less rational when trading.