Leverage Trading
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What is leverage trading?
Leverage trading is a way of trading different asset classes with borrowed funds for increased buying power. It is used in many aspects of trading and does not require anything of the trader except that he or she puts up capital as collateral. The collateral used by the trader is called the margin capital and is the minimum investment needed to trade with leverage.
On this website, we will explain the full definition of leverage trading, how it works, when to use it, what are the risks, the costs, and also the legality of this type of investment strategy.
A leveraged contract is the most profitable but also the riskiest contract your can trade. Day traders use leverage to generate thousands of dollars in profits daily with strict risk management strategies.
What does leverage trading mean?
Leveraged trading means that you borrow funds when trading stocks, forex, options, futures, ETFs, and cryptocurrency, which allows the trader to access more capital than he or she currently has in his or her trading account. There are different types of leverage ratios a trader can choose from and they range from 1:1 leverage up to 1:5000 depending on the broker.
For example, if a trader has deposited $100 in the account and uses 1:10 leverage, the maximum position size would be $1000 which is 10 times more than he or she deposited into the account.
Trading leverage comes with both added benefits and drawbacks as the increased position size can potentially lead to much larger profits and losses. One big benefit to trading with leverage is that a trader can start out with a relatively small account size and still be able to make good profits due to the increased position size. At the same time, this increases the risk of losing money as leverage works in both directions. The biggest drawback is that when the market goes against the trader, he or she will lose money faster than without the use of leverage.
How does leverage trading work?
Trading with leverage works by borrowing capital from your broker at different leverage ratios with different margin requirements. As a trader you can choose your level of leverage and how much margin you want to put down as collateral. The more leverage you use the less margin you have to put down. It lets you trade a stock or a forex pair with more money and open bigger positions than you normally would.
On today’s brokers, it is completely automatic, and all you have to do as an investor is to choose how much leverage you want to use. When it comes to stock trading or cryptocurrency trading there is usually a bar you can increase or decrease to adjust your level of leverage. In forex trading, the leverage is already added by default and you will manage your risk with the position size you choose.
To trade any asset class you need to find a platform, exchange, or broker that offers to trade with leverage. Next up is to create an account, make a deposit, and choose the asset class you want to trade.
Leveraged trading works by amplifying potential wins and losses due to more buying power. For example, if you deposit $1000 in your stocks trading account and use 20x leverage you can buy stocks for $20,000.
Here is the simplified calculation:
1000 x 20 = $20,000
When you buy a stock with leverage you stand to make much bigger profits but also losses. Let’s say for example that you use your $20,000 and buy stocks for all your capital and the market increases 5% over the next couple of weeks you would make $1000. This means that you would make a 100% profit on your initial investment of $1000. The same goes for if the market would decline 5%, you would lose your initial stake of $1000.
Also read: How does leverage affect losses in trading?
Examples of leverage trading
To further describe how the concept works I will use a couple of examples. In these examples, we are going to see how trading with leverage affects your potential profit and loss when the market moves up and down.
Example 1
In this example, we will assume that our first trader has an account size of $100 and he is going to use 1:5, 1:10, and 1:20 leverage. The trader will open a maximum position and earn a profit of 5% on the first trade and lose 5% on the second trade.
| Account size | 1:5 | 1:10 | 1:20 |
| $100 +5% win | +$25 | +$50 | +$100 |
| $100 -5% loss | -$25 | -$50 | -$100 |
As we can see clearly the more leverage you use the bigger your potential profit and loss become. It is possible to double your money with only a 5% increase of the underlying asset you are trading if using a 1:20 ratio. The same is true for the downside, you might lose more than you have invested with leverage.
The good news is that you can protect your downside with risk management tools such as a stop loss and the upside potential is pretty much unlimited so once you hit a good trade you better stick with it. High leverage trading can generate windfall profits. At these levels, leverage trading is very risky but still very profitable. As we increase the ratios, the potential for profit and loss increases significantly. Use a high leverage trading strategy to prevent large losses and improve output.
Example 2
In this second example, our trade has an account size of $500 and will trade stocks with 1:25, 1:50, and 1:100 leverage. The trader will open the maximum position size and earn a profit of 20% on the first trade and lose 20% on the last trade.
Related: What is 100x leverage?
| Account size | 1:25 | 1:50 | 1:100 |
| $500 +20% win | +$2500 | +$5000 | +$10,000 |
| $500 -20% loss | -$2500 | -$5000 | -$10,000 |
At this level, the trades start to be very magnified, and very large profits and losses can happen very quickly. It is important to use some kind of risk management tool to stay in the game and once you hit a winner you should squeeze as much as you can from the trade.
Only using a 1:25 ratio of leverage results in a +$2500 when the underlying asset moves 20% in your direction. This is why crypto and leverage can be such a crazy gold mine and at the same time a terrible idea.
Example 3
In our third example, we are going to look at some extreme numbers in trading with high leverage. Here our trader has an account size of $2000 and he will trade forex with 1:150, 1:300, and 1:500 leverage. Once again the trader is going to use the maximum position size and make a profit and loss of only 3%.
| Account size | 1:150 | 1:300 | 1:500 |
| $2000 +3% | +$9000 | +$18,000 | +$30,000 |
| $2000 -3% | -$9000 | -$18,000 | -$30,000 |
Here we can clearly see the effect of the use of too much leverage. Even though the market only moved 3% up or down, the trader made $18,000 at a ratio of 1:300. If you attempt this kind of trading you should be an experienced trader that knows exactly how to handle this type of situation.
Further down on the page, I will go through some of the calculations made to get to these numbers. If you are interested in learning more about that topic, scroll down to the calculate profit and losses section.
Benefits and Drawbacks
There are several pros and cons of leveraged trading and in this section, I will go through the most important ones. As a trader, you should know what you are getting yourself into when starting to invest in tradable assets with leverage. In some cases, leverage trading is very helpful and you can gain make substantial amounts of money while controlling your risk in a good way. Other times it can be detrimental to your trading account and some traders are better off not attempting it at all.
Pros
Amplified profits: The obvious benefit is that you may increase your profits exponentially since you will be using more capital than you currently have. It is possible to double, triple, or even quadruple your money within a few hours. The profits also happen much faster and it might seem like you are earning money faster than normally. This is the effect of borrowed money.
Enables smaller accounts: If your investment account is less than $500 and you feel that it is not enough to make decent profits you will be able to access more capital in an instant to trade bigger. When used in moderation this approach is very useful and traders have had a lot of success even with small accounts.
Gives the trader flexibility: This is not an obvious benefit for most traders but when you start to develop your skills you will see that you need to branch out to several markets to find opportunities. If you put down only a small amount of margin for each trade you can spread out your risk on several markets and asset classes. This is nearly impossible if you are stuck with a small account size because you will be limited to using all of your capital in every single trade.
Cons
Bigger losses: This is the biggest drawback when it comes to using leverage and most traders are unaware of how fast they can lose a lot of money. Losses can occur much faster and they will be larger than what you have experienced before. This puts any new trader in an emotional rollercoaster and decision-making will become poor. It is possible to lose all your money and more which means that you will be in debt to your broker.
Higher fees: The fee you pay will always be on your full position size. This means that a bigger position size will come with larger fees. For example, if you trade with a 0.10% commission and your position size is $500 you will pay $0.5. If you trade the same account with 1:50 leverage your new position size will be $25,000 and your new commission will be $25.
Very underestimated: Most traders underestimate the power of this approach and many don’t take it seriously. This can cause unwanted losses very quickly due to high-stress levels and the incapacity to make good decisions. The standard trap traders fall into is when a position starts going in the wrong direction and the losses pile up. Here is when hope kicks in and the trader prays that the position will turn around. In most cases, this ends up in unexpected losses.
Different types of leveraged products
Leveraged trading products are seen in all corners of the global market and no matter what instrument you are looking for there will almost always be a way of adding some extra gunpowder into the mix. I will briefly discuss all the different types of products and tradable instruments so that you can educate yourself on the subject and maybe find new interesting ideas for your investment approach.
Read our guide on why do brokers offer leverage to get more insight into this topic.
Leverage stock trading
The stock market is often traded with leverage by both professional and retail investors and it is currently a hot topic. Blue-chip stocks are a very secure investment and if you can add some extra buying power you stand to improve your results year after year. Stocks are often traded by day traders that use leverage in very creative ways to increase their earnings on a daily basis.
Many leveraged CFD brokers offer leveraged trading for stocks and while this can be a very lucrative investment it comes with additional risks. To learn how to trade stocks with leverage you need years of experience and a lot of risk capital. Most beginners fail during the first attempts due to inexperience.
The biggest benefit of leverage stock trading is that if you use it in moderation you lower the overall risk while keeping the bigger upside for yourself. For example, if you were to trade Apple with an account size of $2000 and the market increases 15% in a year your profit would be $300. If you invest in Apple with 1:5 leverage and the stock increases 15% in a year you would make $1500. As you can see, the profit potential is increased by 5 fold while keeping the risk down in a blue-chip stock.
Forex leverage trading
The forex market is famous for its high leverage and it goes without saying that trading fx with leverage can both be rewarding and risky. The currency market is open 24/7, 5 days a week which makes it very accessible to trade both day and night. The forex market is traded on incredibly large volumes which makes leverage trading very suitable since there will never be a liquidity problem.
If you choose to trade forex you need to select a broker and platform that is regulated. This is because forex has gotten a bad reputation among retail traders in the last couple of years and you need to protect yourself from bad actors.
An important aspect of leveraged forex trading is the leverage ratio used. In my own experience, the best leverage for forex is between 1:20 and 1:200.
Most new traders get introduced to forex early on and this is where they take their first step as a new trader. The good thing about forex is that it is a very competitive market and brokers are pushing spread and commissions to record-low levels. This is something good for leverage traders since you are going to pay spreads and commissions on your full position size.
Leverage trading crypto
Borrowing money to trade cryptocurrencies is another game in itself. The cryptocurrency market is a volatile market to trade and with added leverage things can either go very right or very wrong.
The crypto market consists of nearly 20,000 altcoins and many of these tokens are available to trade with leverage on several exchanges. It is possible to buy Bitcoin with borrowed money, make a profit, and then return the borrowed money for very large profits. But of course, this comes with its inherent risk.
Related: Best crypto leverage trading platform
The leverage ratios on crypto exchanges vary and it’s recommended to keep the ratios low only because of the high volatility you will experience. Leverage in crypto trading might be wise to use while the markets have stagnated and are stuck in a trading range for a couple of weeks. This calls for a less risky adventure as long as you know how to handle your entry and exit points.
The most common markets to trade for crypto traders are the perpetual swaps, derivatives, and futures markets which are becoming increasingly popular. As the market grows the number of crypto exchanges grows as well and the accessibility of leverage for crypto traders is becoming easier every day it seems.
Traders attempting crypto leverage should apply their best crypto leverage trading strategy as well as a tight stop-loss. High leverage in crypto trading comes with both risks and increased profits and is not for everyone.
CFD
CFD stands for contracts for difference and it is a trading instrument that is always connected to borrowed money. It is very easy to join a CFD broker the markets they offer cover pretty much the whole spectrum of markets. CFD leverage trading is usually done through a regulated broker and there are several popular and trustworthy choices. Make sure you pick one with sufficient regulation as the regulators have put a lot of pressure on these operators.
CFD traders can access borrowed money in an instant after signing up with an account through the platform and it is very easy to start trading once your account has been verified. The level of leverage offered by CFD platforms can be ridiculously high and I want to raise finger of warning to watch out for, some platforms that have a default leverage of 1:100 for new traders.
CFD platforms are very cheap and the liquidity is often very good as the broker is its own market maker which means that the operator will take the other side of your trade and not another trader. These brokers are mostly used by retail traders since they are so heavily advertised. Many CFD companies are big sponsors of popular football teams, something that has become very popular, for example, Plus500 is the sponsor of Atletico de Madrid.
ETF
ETF stands for Exchange Traded Funds and they are electronically traded funds that are very easy to access and very cheap to trade. ETFs come with different levels of leverage but they usually don’t offer more than a ratio of 1:10. ETF trading has become very popular in past years due to how many new markets they have opened up for different regions.
ETFs are great for long-term investors that want to access more buying power through borrowed money but still have the safety of a great product. Through these products you can also choose to short-sell a specific market through ETFs that are constructed to bet in the wrong direction of an asset class. For example, you can buy SHORTBTC ETF which increases in value when the price of Bitcoin falls. This is a great tool when you think the market has become overheated and is bound to retrace.
ETFs are derivatives products and they often focus on larger asset classes such as a stock index, large-cap stocks, or high market-cap cryptocurrencies. When you buy an ETF you are not buying the underlying asset, but instead, you buy a financial contract that tracks the underlying asset.
Derivatives
Derivatives are financial instruments that offer leverage trading to both retail and professional traders. The most common types of derivatives are futures, options, and swap contracts. Through these instruments, a trader can access borrowed cash to increase profits. They are usually high-risk investments as the leverage offered can be very high.
Derivatives trading has become increasingly more popular in crypto trading and nearly all crypto exchanges that offer margin or leverage trading include derivatives as their main selling product. They are also cheap to trade and very easy to access.
Through derivative trading, you can trade stocks, indices, commodities, currencies, crypto, metals, and bonds. Derivatives also offer an investor to short-sell with leverage in any given market without any complications at all.
Spread betting is a derivatives product for short-term traders where speculation on the price spread is achieved.
The use of spread betting leverage works the same way as any other product on the market. An initial margin deposit is required and you can also choose your leverage ratio.
Perpetual Swaps
Perpetual swap contracts are a relatively new financial investment instrument that also offers leverage and they are very similar to futures contracts with the one difference that they don’t have an expiration date. This makes them a very flexible trading instrument and you can use it both for day trading and long-term investments.
Swing traders often use perpetual swaps to find good liquidity, low fees, and flexibility. Crypto exchanges have also started to roll out perpetual swap contracts to enable their users to access more capital. Perpetual swaps also let the trader short-sell the market and bet in the opposite direction.
Perpetual swaps come with high risk and high rewards as the leverage ratios can sometimes be very high. These contracts should only be traded by experienced traders and not attempted by novice traders.
Futures
Futures have been around for a long time in financial markets and it’s a sort of derivatives instrument where a buyer and seller agree on a future price where a settlement will occur. Futures are used by both retail and professional traders to access high leverage in several different markets.
Futures are also used as a hedging tool when the market is turning negative. Instead of selling your initial position in a stock, you can choose to short-sell a futures contract and even out your positions. This is mostly attempted by professional managers and bigger hedge funds.
If you are interested in starting to trade futures you should read up on the mechanics of the contract before starting since the expiration date might surprise you. To trade futures with high leverage is considered a high-risk endeavor and should be avoided if possible. Only enter the market with the amount you can afford to lose if you trade futures.
How to trade with leverage
Many questions are asked by beginner traders when they first get into investing long-term with leverage.
“Is it good to trade with leverage?” and “What is the best leverage for beginners to trade with?”
These are common questions and I will try to explain how to trade stocks, forex, crypto, futures, or any other asset class with increased buying power.
To get started with leverage trading you first need to qualify for an account and sign up with a broker, platform, or an exchange depending on the market you want to trade. From here is easy to set up a leveraged account and start trading. The first step you need to do is to choose the amount of capital you want to deposit, this will be your risk capital. After you have verified your identity you are ready to make a deposit.
Once you have made your deposit and have entered the trading interface it’s pretty straightforward from here. You choose your asset class or market and then select the level of leverage you feel comfortable with. I would recommend starting very slow with a 1:2 or a maximum of 1:5 ratio in the beginning.
Before you enter the market, make sure that you have access to the correct risk management tools such as stop loss and negative balance protection. No leverage investments should be made without either one of these tools. Depending on your analysis and research of the stock or contract you are investing in you can now go ahead and buy the underlying asset.
Trade management is learning how to trade stocks with leverage and once you have entered the position it is your responsibility to keep track of your P&L ratio. A good tactic when you are “in the green” or when your position is positive is to raise your stop loss to break even and from here you keep raising it to lock in profits.
Calculate profit and losses
When it comes to calculating your potential profit or loss you need to know the basics of how the mechanism works. If you use a 1:10 ratio, your profits and losses are going to be 10 times bigger. If you use a 1:50 ratio, your profits and losses are going to be 50 times bigger. That’s the basics.
Now, how much can you earn and how much can you lose with leverage trading? This question is more complicated because you need to know your full position size before entering the market.
Let’s say that your account size is $1000 and you are going to calculate your potential profit when trading with 1:25 leverage. Let’s imagine two scenarios, one where you earn 2% and another where you earn 12%. Here is the calculation.
First, we calculate the new maximum position size.
1000 x 25 = $25,000
Then we calculate the profit on that new position size.
25,000 x 0,02 = $500
In our first example, we made $500 from a 2% gain with only $1000 invested. Now let’s see how much you stand to make from a $1000 investment, 1:25 leverage, and a 12% market appreciation.
First, we calculate the maximum position size.
1000 x 25 = $25,000
Then we calculate the profit on that position size.
25,000 x 0,12 = $3000
Related: Calculate position size crypto
If you made this trade in a real-world scenario you would make a profit of $3000 with a $1000 investment. That’s three times the money. If you can find these opportunities with proper risk management you can potentially make a lot of money.
To learn exactly how much of your own margin capital you are investing in each leveraged position, use our leverage calculator to find out. Use our stock leverage calculator if you are an active stock trader.
Additonal resource: Do you need to pay back leverage?
When to use leverage
Let’s discuss the best way to use leverage and when to use it for everyday traders and investors. Many of you know that it can be risky and that you need some experience to start, but when exactly should you use leverage and how much should you use to increase your position size?
This boils down to your current account size and your risk appetite. Some investors feel comfortable taking on a lot of risk to chase bigger returns and others don’t feel comfortable with using more than 1:5 leverage.
When you use leverage, be prepared to lose money, that’s just the name of the game here. Don’t be surprised if you get shaken out of the market quickly and in an unforeseen way. This happens all the time and it’s normal to not hit your entry on several trades before you get it right. Some good practices to have when investing in financial markets with leverage are:
- Buy or sell when the market is trending
- Always confirm your entry on several time frames
- If unsure, enter in small portions at a time
- When in profit, lift your stop-loss to breakeven
- If the market is wide, use a wide stop-loss
- If the market is small, use a tight stop-loss
- It’s only acceptable to increase leverage when in profit
- Never add to a losing position
There are several ways to deal with the market and it takes time to learn the best practices for leverage trading. The best tip I can give is to start out small. Even a small account size can grow a lot with this approach so don’t be in a hurry.
Risk and management of leverage trading
For those who are thinking about starting out with borrowed money to increase their buying power, there are several risks to be aware of and some tools of management. The most obvious risk is of course the risk of losing money. However, there are other more subtle risks that you should know. There is a risk of liquidation, unlimited losses, margin risks, and of course the well-known margin call. I will try to explain these risks in simple terms to educate you on the subject.
Minimizing risks is the most important aspect of leverage trading and you should always use the proper risk management strategies. It’s not only about order types to protect you from unexpected losses, there are also strategies to avoid risk in regards to when you enter the market, how you enter the market, and where you are trading. Some brokers and platforms will have more risk by the nature of how they are run and which company is behind the platform. In short, there are a lot of bad actors out there. Keep reading to learn more about the biggest risks of trading with leverage.
Unlimited losses
Leverage should be used with caution when tried for the first time. If you are not careful your losses might mount up. The reason why it’s so risky is because of the high purchasing power which can sometimes be hard to control. Unlimited losses can theoretically incur if you are trading with a broker that does not operate with the right risk management systems such as stop-losses och negative balance protection. On some brokers or exchanges, it’s possible to lose more than your own money which would put you in debt with the broker. If you use very high leverage you can lose a lot of money in an instant.
Margin risks
When you trade with borrowed money you are putting down your own money as margin collateral which is always used first as risk. For example, if you have an account size of $1000 and you use a 1:50 leverage, your maximum position size would be $50,000. If you maximize your purchasing power and enter the market with the full $50,000 you only need a 2% decline in the market to lose all your margin. This is the main risk when it comes to your margin capital.
To avoid risking your margin you can choose a lower ratio such as 1:5 or 1:10 and use a stop-loss to prevent unwanted losses. A stop-loss order is one of the best tools for any trader to control the risk. Even if you trade with the full lot of $50,000, a stop-loss will stop you out at the smallest down movement of the market and your margin stays safe.
Margin call
A margin call occurs when your losses are getting close to the full amount of your initial margin. For example, if you trade your $1000 with 1:10 leverage and the market moves against you, your capital will fall negative pretty fast. If your losses amount to close to $1000 your broker or exchange will give you a margin call saying that you are out of risk margin and your position is about to close out.
There are three ways to deal with a margin call. First, you can deposit more money to save your position and give the market more room to move and perhaps turn around. Second, you can close out your position immediately and save what’s left of your margin. Third, you can do nothing and pray to god that the market will spare you this time. The third option is the worst and should be avoided at all costs. If you have more risk capital to use you can choose the first option and deposit more money if you have strong conviction in your analysis of the market. If you don’t have more risk capital you should close out the position and take the loss.
Liquidation
Liquidation occurs after you get margin called and the market keeps going against you. Liquidation in leverage trading means that your position will get closed out and liquidated. Your position will close out in a maximum loss and all your margin capital will be lost.
This is the worst-case scenario for any trader or investor and should be avoided. Liquidations happen when a trader loses control over the liquidation price and of the position either due to a lack of experience in how leveraged trading works or because of some other error in trade management.
The best way to prevent a liquidation is to always use a stop-loss order to protect the downside of your trade. With a stop-loss you are always guaranteed to get out of the market at your own will, counting with some slippage. If you are a beginner trader you should paper trade with leverage or demo trade with margin before you start to see how the market will affect your position size.
Related: Liquidation price calculator
What are the costs and commissions?
Here is a question that gets asked all the time, how much does it cost to trade with leverage? The question is simple, it costs the same, and nothing changes. The fee or commission you pay when trading with leverage is the same with one thing to keep in mind. Trading fees and commissions are always based on the full position size unless the exchange or broker offers a flat fee.
Let’s say that you trade crypto without leverage and your fee is 0.10%. If you open a position of $1000 your trade fee would be $1. Here is the calculation:
$1000 x 0.0001 = $1
Now, let’s say that you trade with the same exchange but now with 1:10 leverage, how much would you have to pay? You will pay the same 0.10% fee but now on a bigger position size. In the first example, your position size was $1000, now your new position size will be 10 times bigger $10,000. So, if you open a position of $10,000 with a 0.10% commission, your total fee will be $10. Here is the calculation:
$10,000 x 0.0001 = $10
It is very easy to get confused when calculating the fee of leverage trading. The only thing you have to keep in mind is that the bigger your position size is, the more you will pay in commissions. As mentioned above, some brokers or exchanges might have a flat fee that doesn’t change no matter how much you trade. Always check your commission table before starting. You should always choose a broker or a stock exchange with low fees when using leverage to minimize costs.
Why do traders use leverage in trading?
So, there a plenty of reasons why traders use leverage in trading but there are three reasons that are more common than others. The most obvious reason is to increase profits and earn more money, the second reason is that a trader might have a small account, and the last reason is to be more flexible and versatile when it comes to choosing several markets to trade.
Bigger profits
With more purchasing power your profits increase as well. This is one of the most common reasons why traders and investors borrow money. It is possible to multiply profits by 2 times or even up to 200 times depending on the margin you put down and the ratio you use.
Bigger profits do not come without added risks and all investors who are in search of larger gains should know that it’s very difficult to make big profits continuously. Only the best traders and investors have the right methods for entering and exiting the market profitably week in and week out. However, if you enter the market at the right time you may make more money in one trade than you have made in weeks or months of trading.
Small accounts
This is possibly the second most common reason for adding leverage to your investments. A small account is very limited and even long-term investments don’t yield good returns with a small account. When using borrowed funds, your profit potential opens up and your small account suddenly gets more useful.
Most new traders and investors who start realize pretty quick that an account of $200 or even $500 doesn’t go far. Access to more capital makes things both more interesting and in some cases more profitable. But, be careful how you use your newly added buying power, it’s a double-edged sword.
More versatile
Traders who work in several different markets need a bigger account to be more flexible. To be able to enter and exit several markets at the same time, small traders need to add leverage to be able to “move the needle”.
In automated trading, many traders use lower ratios of margin and split it around several accounts and exchanges to diversify their risk. This is a very conservative way of using it and in many cases, it lowers the risk profile. Keep in mind that increased leverage over several accounts increases the fees and commissions paid to the brokerage.
Which platforms offer leverage?
Several trading platforms offer leverage to retail traders and investors. If you are a stock trader you should look for a reputable stock exchange, if you trade forex you should look for a legitimate forex broker, and if you are a cryptocurrency trader you should find a regulated crypto exchange.
I want to raise a finger for all beginners and say that many brokers and trading platforms that offer leverage are not legitimate. This community of brokers has gotten a bad reputation down the years and this is thanks to many bad actors that want to make a quick buck without offering much of a service to their customers. Now, let’s take a look at the options you have.
Stock Exchanges
Many stock exchanges offer products and derivatives that have added leverage. Usually, the ratios are not more than 1:10 or a maximum of 1:20. This is because many stock exchanges have strict rules and regulations that limit their offerings. Stock exchanges normally offer swaps, mini-futures, derivatives, turbos, and ETFs with leverage and they have become very popular during the last few years.
It’s not possible to buy an underlying stock with added leverage, it has to be some kind of derivative contract that is produced by the broker or by a market maker. When searching for a stock exchange you should always turn to the big ones that have been in the game for a long time. Trust is the most important factor here.
Forex Brokers
Forex brokers offer very high leverage and this style of trading has been promoted heavily to attract new investors into buying and selling the currency market with increased buying power. Many forex brokers offer up to 1:2000 leverage for retail customers. This is considered high-risk investing and should only be attempted by experienced traders. The forex market is the most liquid market in the world and therefore it’s possible to offer these high ratios.
The big forex brokers are doing a good job of increasing the security for their customers by adding advanced risk management tools such as negative balance protection, insured funds, and high-quality order types. I recommend all new investors find a local broker that is regulated and have a big following.
Crypto Exchanges
Crypto is the latest asset class to welcome leveraged trading and it is increasing in popularity each year. Many crypto exchanges offer derivatives trading such as futures, perpetual swaps, turbos, and leveraged ETFs.
Crypto is a little bit like the wild west of investing at the moment and it can sometimes be hard to find a reputable exchange that securely offers leverage. Few regulated exchanges offer increased buying power and I see that the demand for legitimate platforms increases all the time. Many new platforms are taking on the job of offering high-quality services with leveraged investing opportunities for crypto traders. Always look for a local and regulated exchange when searching for a good crypto platform.
Leverage ratios explained
Leverage ratios can be difficult to understand. To make things as simple as possible I will show you how they work in an easy-to-understand table. I will show you how the different ratios affect your account size. I will also show the different ways that ratios are displayed on different brokerages and exchanges. There are two ways of displaying these ratios:
- 10x
- 1:10
Both of these ratios mean the same thing, it stands for 10 times leverage. If you use a ratio of 1:10 you increase your account size 10 times, or your buying power is increased by 10 times. Let’s take a look at how a ratio of 1:10 affects your account size and maximum position size.
| Account size | 10x / 1:10 | 25x / 1:25 | 50x / 1:50 | 75x / 1:75 |
| $100 | $1000 | $2500 | $5000 | $7500 |
| $500 | $5000 | $12,500 | $25,000 | $37,500 |
| $1500 | $15,000 | $37,500 | $75,000 | $112,500 |
| $5000 | $50,000 | $125,000 | $250,000 | $375,000 |
| $10,000 | $100,000 | $250,000 | $500,000 | $750,000 |
As you can see above, it’s pretty simple to see how the ratios affect the maximum position size of the account. If your account size is $500 you multiply it by the leverage you use and that is the maximum position size.
Buying power explained
Buying power is often expressed in leveraged trading and i’s something that deserves to be explained. So, what is buying power? It is the total amount of capital you have available to buy a financial asset such as a stock, a forex pair, or an ETF. If your account size is $1500, your maximum buying power is $1500. Why this is so interesting is because with leverage you can increase your maximum buying power depending on what ratio you use.
If you borrow 25 times the money you have in your account, your buying power is increased by 25 times. For example, if your account size is $1500 and you borrow funds with a ratio of 1:25, your new maximum buying power is $37,500. Here is the calculation:
$1500 x 25 = $37,500
This calculation can be applied to all ratios you use when borrowing funds from your broker or platform. Just think of your new maximum position size as your maximum buying power.
What is the difference between margin vs leverage?
The difference between margin and leverage is very simple to understand but many investors confuse it and think it is the same thing. The funds you put down from your investment account are your margin and the funds your receive from your broker are the leverage. Below is the simplified explanation.
- Margin = Your own capital
- Leverage = The funds you borrow
Margin is the collateral funds that you have to put down to be able to borrow money. Without an initial deposit, you can’t trade with leverage. Depending on how much margin you put down and how much leverage you borrow your maximum account size will vary. When you see the words “margin requirements” you will immediately understand that there is an initial deposit requirement to borrow leverage.
The margin ratios can also be explained sometimes as 1,50% to indicate how much of your own money you need to put down as a deposit. It’s the same thing as when you go to the bank and ask for a car loan or a house mortgage. You will not get a single penny without adding some of your funds first.
Retail vs Professional leveraged trading
There is a distinct difference between retail and professional trading when it comes to leverage. Most professionals only use a maximum of 1:3 leverage while retail investors try to maximize their purchasing power to increase their profits. This is completely wrong and the professionals know it. The reason why the professionals use lower ratios is that they are mindful of the risks. With a ratio of 1:3, your liquidation level is only 33% below your execution price. So, if you buy stocks with a 1:3 ratio of leverage and the market falls more than 33% you are out of the game.
When professionals buy stock or ETF they use strict risk management and low ratios to stay out of harm’s way. They use leverage as a small booster for their capital and try to increase output by 5% or 10%. When retail investors invest with leverage they think that a higher ratio will increase their gains.
To stay in the game and survive the ups and downs of the market you have to control your risk at all costs. The rule of thumb is to manage your downside and the upside will take care of itself.
Is it legal?
Leveraged trading is legal in many countries but it depends on how it is offered. For example, CFD trading is completely banned in the USA, and crypto leverage trading is banned in the UK. However, there are still many off-shore platforms that offer leveraged products on nearly all financial assets. I recommend that you read up on your local guidelines to avoid trouble with the government and the tax authorities.