Multiplier is an amazing tool that can maximize your returns from a deal by increasing your trading capital. However, it can be dangerous as it will equally maximize losses as well, in case of an unprofitable outcome.
When trading on the IQ Option platform, you can apply multipliers for certain asset types: Forex, Stocks, Commodities, ETFs, Crypto. Read the full article to learn how to properly use this platform feature and what are the considerations.
What is a multiplier?
By using multipliers, a trader is able to manage a position larger than the amount of money he or she has. For example, if you open a position with $100 and use a x5 multiplier, your total volume will be $500. The potential profit (and loss) will be calculated as if you had invested $500, respectively.
In other words, the payout you get (and the loss you bear) will be five times bigger based on the trading volume. This feature can be extremely beneficial, especially in the case when the price movement direction can be correctly predicted by the trader. Otherwise, the usage of a multiplier can incur bigger loss in case the trader does not make a correct prediction and the deal closes with a negative result.
What is the multiplier for?
The multiplier or leverage is traditionally used on the Forex market. The reason is simple: currency pairs usually do not have significant price movements, and their daily changes are quite hard to speculate on. As a solution, traders turn to the multiplier to speculate on small price differences and still achieve great results with higher profits.
This tool can now be applied to other assets, not just Forex. It can be a good instrument to use when you want to regulate the level of risk in your trading. In each separate case you can decide whether it is more important for you to have low risk (low or no multiplier) or high reward (with a higher multiplier). Whichever option you choose, it is always beneficial to have more options.
In order to understand how leverage works in practice, let’s look at an example of a trade with the use of a multiplier.
Let’s say that a trader wishes to open a deal on the Forex pair EUR/USD. The available balance that the trader can afford to invest in this deal is $20. As you probably already know, the profits for the CFD deals are calculated with the following formula for long deals:
(Closing price / Opening price - 1) x multiplier x investment
Let’s say that the trader enters a long (“Buy”) deal at the level of 1.196510 and holds it for one day, closing it at 1.21061. If a trader does not use any multiplier, the profit would be the following:
(1.210610 / 1.196510 - 1) x 20 = 0,23 or 2 cents.
2 cents does not seem like a good enough profit, especially when you are holding the deal for a longer period of time. This is why the multiplier is normally used for deals in order to allow traders to borrow funds from the broker and increase the volume for their deal.
Let’s look at the same deal, but with an applied multiplier of x100. This way, the volume that the trader operates with is not $20, but $2000. The profit calculation would look like this:
(1.210610 / 1.196510 - 1) x 100 x 20 = 23
The application of the multiplier allowed the trader to receive $23 or more than 100% profit from the same deal.
Of course, the higher is the multiplier, the higher the risk is as well. With the applied multiplier, every pip of the price change costs more, so a trader may lose significant amounts of investment in a very short period.
For instance, a trader opens a deal on AUD/JPY expecting the price to fall. The investment used is $20 and the multiplier is x200, which means that the volume is $4000. The deal is opened at the level of 79.36700, however, instead of falling, the price goes up and the deal closes at the stop loss at 79.6909.
The formula used to calculate the profits for a short deal is the following:
(1-closing price/opening price) x multiplier x investment
Therefore, the calculation with the multiplier will look like this:
(1-79.6909/79.3670) x 200 x 20 = -16
Which means that the trader’s loss will be $16, since the price went against them.
Applying multiplier in the traderoom
To apply your multiplier, select Forex, Commodities, Crypto or Stocks from the list of available trading instruments at the top of the screen. Then select the multiplier you want to apply before opening your position. Its value depends on the asset you have selected — some allow for a higher or lower leverage. As was mentioned before, the higher the multiplier, the larger the position you can operate with (but also the higher the possibility of losing money).
It is needless to say that the usage of a multiplier requires some caution and it is much better to practice before starting to apply it to your deals. However, there is no denying that it is a wonderful tool for traders with some experience who are not afraid to risk for a higher profit.