Training Center
What Is Leverage Trading?
Leverage allows traders to increase the size of their open positions by trading with the brokers money. As long as the trader can meet the necessary margin requirement, it’s possible to open leveraged trades often up to x400 the actual sum invested. A leveraged trade is potentially highly profitable, but he risk level increases proportionately.
Common leverage amounts offered by most brokers:
| Instrument | Leverage |
|---|---|
| Forex | Up to 1:400 |
| Commodities | Up to 1:200 |
| Indices | Up to 1:200 |
| Shares | Up to 1:50 |
| Bitcoin | Maximum 1:10 |
Examples of leverage trading
1. Your broker will give you x200 leverage on stocks. If you want to trade a large volume of Amazon stocks, but don’t have the funds, you can make a leveraged trade. All you have to do is meet the broker’s margin requirement. You calculate that you can afford to open a position on Amazon with $100. By taking leverage, you can increase your exposure to $20,000 ($100 x $200). If the trade is successful your profits will be proportional to your leverage. If the trade fails, you will lose the $100 investment, plus a proportion – or all – of your margin (depending when you closed the position).
2. You have an account balance of $2,000. Your broker provides x400 leverage for forex trades. You can open a leveraged position worth $800,000 ( $2,000 x 400 = $800,000
3. You have an account balance of $10,000. Your broker offers leverage of up to x10 for cryptocurrencies. This allows you to open a leveraged position of up to $100,000 on Bitcoin ($10,000 x10 = $100,000).
Margin Trading
Margin is a trading term for a cash reserve that you maintain in order to open leveraged positions. It is simply part (or all) of your trading account balance. There are no special arrangements for paying or holding the margin. Each leveraged trade will produce its own margin requirement. As long as you have adequate funds, you can open several leveraged positions simultaneously. Think of the margin as a form of deposit or collateral when you are trading with the broker’s money. You can use your margin to go either long or short on any position. If your leveraged trade fails the margin will be automatically deducted from your account balance.
1. The initial margin is the deposit or collateral required by a broker before you can open a leveraged trade. The margin requirement is always expressed as a percentage and typically ranges from 0.5% for some indices, all the way up to 30% for certain stocks. The more poorly capitalised and liquid an asset, the higher the margin. Different brokers will require different initial margins and some traders may be offered lower margins if they have VIP level account types.
2. Variation Margin is applied to open positions and adjusts in line with the changing value of the underlying asset. For example, if a CFD trade ropens a position on 1,000 shares in Google at $500 and the price fell to $400 the broker would deduct $100,000 in variation margin (1,000 shares x $100) from the client’s account. If the share price rose by $100 the broker would credit the client’s account with $100,000 in running profits.
Spread
Spread is a trading term for the cash difference between the BID and ASK price of any asset or financial instrument.
If a broker offers EUR/USD at 0.91234/09, this means that you can buy 1 EUR from him for 0.9129 USD or sell him 1 EUR for 0.91234 USD.
There are two kinds of spread on forex platforms: Fixed spread and variable spread.
1. Fixed Spreads – A fixed spread doesn’t change, regardless of market conditions. This allows traders to plan their trades easily and calculate potential profits and losses. This is particularly useful if you are planning short term trades or the markets are especially volatile. The disadvantage is that fixed spreads can sometimes be less competitive than variable spreads that may come from several sources and are continually adjusted.
2. Variable Spreads – Variable spreads are continually adjusted and updated according to market conditions. In times of high liquidity, spreads tend to fall, making trading more cost effective. However, if trading suddenly intensifies (for example just after an important economic event) the market will shrink and the spreads may suddenly increase. The difference between a bid and ask price might become as high as 20 pips. Trading costs will therefore become more expensive.