What is leverage in online trading

Leverage is one of the many terms you’ll hear floating around in the online trading world. However, not everyone understands what it means. So in this blog, we’ll talk about what leverage is, how it works, and what markets you can trade with it.

What is leverage

Leverage is a crucial aspect of CFD trading. It refers to using borrowed funds to increase your trading position beyond what your cash balance allows.

Many traders take advantage of leverage to improve their strategies and maximise their potential gains. But, there’s a catch to leverage: it can also result in larger losses than expected if it’s not used strategically. That’s why before applying it to your trades, make sure you’ve carefully analysed the markets and are sufficiently confident it will benefit you.

How it works

Essentially, leverage lets you open larger positions for a fraction of the trade’s value. For example, if you want to open a CFD of asset X that costs 1,000 USD, even if you only have 10 USD, you can do so with leverage of 1:100.

The higher the leverage, the lower the capital you need to open a trade. This in turn boosts the purchasing power of your capital allowing you to take advantage of small price changes and to expand your market exposure.

Margin refers to the deposit required to open a leveraged position, taking into account spreads, leveraging, and currency conversions. You use a margin calculator to determine how much margin you need to increase the market value of your position.

For example, if asset X has a price of 100 USD and the leverage is 1:100, then the required margin to open 1 CFD of X will only be 1 USD.

Let’s say you’d like to open a position of 100 CFDs (or 100 lots) of X with a buy order (you expect that the prices of asset X will increase), here are the possible outcomes of the trade opened with leverage: 

  • If the price of X increases to 105 USD, you make a profit of 5 USD per CFD.
    Since you bought 100 CFDs, this gives you a total profit of 500 USD (100 CFDs ✕ 5 USD = 500 USD).
  • If the price of X decreases to 95 USD, your total loss is 500 USD.

Based on these outcomes, leverage can increase profits, but it can also increase losses.

How to manage risk in leveraged trading

Leveraged trading involves high risks, so it’s smart to use standard risk management features on trading platforms such as stop loss and take profit. Stop loss and take profit orders will help limit the potential loss you may incur or secure the profit you make.

When you place a stop loss order, you specify the exact price at which your position will automatically close at a loss. It lets you specify how much you want to risk, allowing you to limit your losses before they grow larger than expected. 

Whereas when you place a take profit order, you specify the exact price at which your position will automatically close. This allows you to secure your target profit before the market moves against your favour.

Markets to trade with leverage on Deriv

The markets you can trade with leverage on Deriv are forex, stocks and stock indices, cryptocurrency, commodities, and synthetic indices. Each of these markets operates differently so it’s important to be careful when trading them with leverage. You can trade them on Deriv MT5 and Deriv X.

Forex

Get access to over 50 popular currency pairs and trade with leverage of up to 1:1000 (max 1:30 for EU/AU) to maximise your market exposure.

Stocks and indices

Take advantage of competitively priced equities and asset baskets — from your favourite household brands to international indices — available to trade with leverage of up to 1:50 on stocks and up to 1:100 on indices (max 1:5 on stocks and 1:20 on indices for EU/AU) outside regular stock market trading hours.

Synthetic indices

Trade synthetic indices round the clock with leverage of up to 1:1000. These indices simulate real-world market movements, offer constant volatility, and are free of liquidity risks.

Commodities

Predict the price movements of commodities such as silver, gold, and oil and benefit from leverage of up to 1:500 (max 1:20 for EU/AU) to boost your potential gains.

Cryptocurrency

Trade the world’s most popular cryptocurrencies with over 17 crypto pairs to choose from. Benefit from this highly liquid market with leverage of up to 1:50 (max 1:2 for EU/AU).

In summary

Many see leverage as a double-edged sword but once you learn how to manage it, there’s no need to fear it. If you’re a beginner, a smart way to work your way around it is by starting small no matter how tempting the leverage ratio is. It’s never a good idea to head straight for large amounts, as doing so may completely impact your trades.

Want to practice trading with leverage? Sign up for a free demo account that’s pre-loaded with 10,000 USD virtual money. 

 

Disclaimer:

The information and content posted within this blog are for educational purposes only and it is not intended as financial or investment advice.

Certain leverage conditions stated in this blog post are not available to clients residing within the EU or UK.

Cryptocurrencies and synthetic indices are not available for clients residing within the UK. 

Deriv X is not available to clients residing within the EU or the UK.