When beginners are dealing with leverage trading it is important to find the perfect balance between risk and buying power.
Understanding how a leverage ratio of 2:1 works can help traders maximize their returns while at the same time controlling the risk.
Doubling your money is not as easy as it seems when trading forex, crypto, or stocks but a good start is to double your margin buying power.
In this article, we are going to take a closer look at what a 1:2 or 2x multiplier is.
Key takeaway
- 1:2 or 2x leverage means that the trader is able to use twice the size of his trading account to trade the market, or in other words, he can double his trade size.
- 1:2 leverage increases both profits and losses by 100% compared to trading forex without leverage.
- The margin requirement for a position with a 1:2 multiplier is 50%. Let’s say that you want to open a position worth $5000 with 2x borrowed money, then you need to deposit $2500.
Content table
- 1:2 leverage explained
- Margin requirements at this level
- DIfferent names
- How to use a in a simple way
- Examples to show you the ropes
- Platforms that I recommend
- Benefits
- Drawbacks
- How it affects your downside
- Comparing other ratios
- Why you need to worry about lot size
- The big picture risks involved
- FAQ
- Conclusion
What does 1:2 leverage mean?
When you are leverage trading with 1:2 leverage, it means that you borrow twice the amount of money that you have deposited in your trading account.
With a 1:2 ratio, it means that your profits and losses are increased by 100% as well as your trading fees.
Another important factor to understand when using this ratio is that you will have a liquidation price at a distance of 50% from your entry price.
This happens because your 2x leveraged position is built by 50% of your margin capital and 50% borrowed money.
How beginner traders can go about trading this level
To use a 2x multiplier you first need to find a low broker that offers this type of ratio and your preferred asset class.
Then you need to select an amount of collateral capital as your initial investment. The collateral money will work as your margin when opening positions.
Your trading platform must let you select a 2x ratio before you start trading, otherwise, you might be getting in using too much borrowed capital immediately.
Once on the platform, select the entry price, your stop loss, your take profit order, and enter the market. From here you need to monitor your position and use leverage risk management.
Real-world example to show you what it means
One example of 2x leverage is crypto trading, where you can trade Bitcoin and other popular cryptocurrencies with a low ratio.
Let’s assume that you want to buy a Bitcoin contract worth $10,000 with 2x your initial capital, you would first have to deposit $5000 to be able to afford the margin requirement.
Another example would be trading forex with a 2x boost which in essence means that you can double your trade size.
For instance, a trader with an account size of $3000 would be able to open positions worth $6000 with a 1:2 ratio.
This is where margin requirements start becoming a thing
A margin requirement is the amount of money that a trader needs to deposit into his trading account to qualify for open positions.
Each ratio has its margin requirement and the margin requirement for a 1:2 multiplier trade is 50% or half the value of the trade.
This is the general idea of how much your margin requirement is, however, different brokers have different rules so always make sure that you read the fine print before starting to trade.
For example, let’s assume that you are trading with a 2x ratio and you want to open a position size worth $8000, then your margin requirement would be $4000.
Why do they call it different things?
The difference between 1:2 and 2x credit is the way that the ratio is expressed. Technically there is no difference between the two.
2x borrowed capital is expressed as a multiple of your investment and explains that you will be able to trade twice the size of your initial deposit.
The other version, 1:2, explains the ratio of the amount borrowed. It states that 1 half of the position will be borrowed money.
It doesn’t matter which way you prefer to write it as it will still explain how much money you are borrowing for the position.
Popular platforms that offer this kind of ratio
There are plenty of options for traders who are looking to trade with a 1:2 ratio, including crypto brokers that offer high margin, forex brokers, spread betting brokers, and options brokers.
Some of the most popular names are listed below:
- BYDFi (crypto)
- ByBit (crypto)
- AvaTrade (forex)
- Admiral Markets (forex)
- IG (spread betting)
- CityIndex (spread betting)
- InteractiveBrokers (options)
Choosing a platform comes down to personal preferences but there are some important factors to oversee before starting.
Fees are a big part of how leverage brokers make money and are also a big issue for traders who like to trade big. Make sure that the broker doesn’t charge too much for opening trades.
Regulations and security go hand in hand and you should always make sure to choose a broker that has at least one government regulation.
Benefits
The main benefit of using a 2x ratio is the perfect balance between buying power and risk.
You will be able to double your trades which will give you a 100% boost when making a profit while at the same time maintaining a relatively good risk profile.
Let’s say that you want to trade a $10,000 contract in the forex market and you make a 2% profit.
This would normally give you a profit of $100, however, with a 2x ratio your profit is increased to $200.
Another positive side of using such a ratio is that beginners can get started in leveraging their trades without having to worry too much about taking on too much risk.
Drawbacks
There are of course a couple of drawbacks when using borrowed money to increase your trade size.
First off, I would say that controlling losses will be the biggest problem if you are coming from a background trading the spot market.
You will have to re-calculate your maximum loss and also re-calculate where to add your stop loss before entering the market.
Additionally, using a 2x multiplier will open up the risk of margin calls and liquidations.
A margin call is a warning signal from your broker telling you that you have slipped below the required margin levels and your positions might be at risk.
Liquidation is a total loss of all funds in your trading account. This happens when your losses run free without any sort of protection or oversight.
Now some info you should know about losses
The biggest difference between trading the spot market vs the credit market is that at a ratio of 1:2, your losses are increased by 100%.
That is a pretty big step for someone who has never tried trading with borrowed money before and at first, it can come as a shock.
For example, if you deposit $2000 into your spread betting account and open a trade with a 2x credit line, your total trade size is $4000.
Now, if you lose 10% on that position, your total loss will amount to $4000 x 0.10 = $400.
This is a loss of twice the size of your initial investment and this is how leveraged losses work.
Comparing it to other ratios
When compared to other ratios, a 1:2 multiplier is the lowest ratio that can be used with borrowed money.
The next step down the ladder would be 1:1 margin and the next step up the ladder would be 1:3.
Other common ratios that beginners use are 1:5, 1:10, and 1:20.
Remember, each time you increase your multiplier, both your potential profits and losses are multiplied by the ratio you have chosen.
Your margin requirement and your liquidation price will also change and it is your job as the trader to keep an eye on all of these factors.
What you need to know about lot sizes at this level
The lot size is the number of units that you can trade with the capital you have in your trading account, the more money you have allocated to your account, the bigger the lot size you can trade.
When trading with a 2x ratio, your lot size is increased two times. This means that for every $1 you deposit into your trading account, you gain an extra $1 in lot size.
This goes for whatever leveraged product you trade. There is no difference in trading forex compared to crypto.
Let’s say that you want to buy 10,000 units of an FX pair, with a 1 to 2 ratio you will only have to put up with half of the trade, which is 5000 units.
The other half will come directly from your broker. Keep in mind that leverage is always paid back to the broker once the trade is closed out.
And of course there are some big risks attached
Margin is the amount of money that you deposit in your trading account to access a borrowed purchasing power.
This also comes with two underlying risks, margin calls, and liquidation.
Should your trade move against you and the losses exceed close to the amount of margin you have put up to enter the trade, your broker will send you a margin call.
This is a warning from the broker telling you that you are running dangerously low on margin collateral. At this point, you can either close out the position or deposit more funds.
If you choose not to do anything and the market keeps moving against you to the point that you completely run out of margin capital, your account will get liquidated.
At a 1:2 ratio, the risk of a margin call and liquidation is much lower than if you were to trade on a higher ratio.
FAQ
Yes, it is. Two times your initial deposit means that you are doubling the amount of money you have deposited into your forex account.
At this point, your broker will send you a margin call asking you to take action. You can either close the trade or deposit more funds.
Always calculate your potential profits based on the full value of your position size.
Yes, trading at this ratio is a perfect balance of buying power and risk. Many beginners start out at this ratio before moving up the ladder.
Conclusion
1:2 leverage is a choice that many new forex traders and crypto traders choose to get the best of both worlds when it comes to profits and risk.
Traders can double their money when making profitable trades without risking more than the amount of the stop loss.
It is important to have a solid trading strategy when leveraging any market and even if you are choosing a low ratio you need to both understand your market and have a good plan.
In this guide, I will explain the ins and outs of the 2x leverage ratio so you know what to expect before entering the markets.
