A Guide To Day Trading With Leverage
Those who have tried day trading in any type of market might wonder if they would do better if they use leverage or if it’s just a myth that margin-traded accounts increase profits straight away.
It can be difficult to make enough revenue as a trader without a decent account size and for day traders especially, leverage adds that extra buying power that is needed to see larger gains.
This is going to be a complete guide on what day trading leverage is, how it works, if necessary, and what you need to think about if you decide to leverage up your account.
Below are some helpful guides that will be useful for beginners looking to day trade with leverage.
- Day trading leverage is borrowed capital that requires an initial deposit called margin collateral and is used to multiply position size for day traders.
- Day traders can access leverage by choosing a leveraged trading platform such as a Forex broker, CFD broker, or a Spread Betting platform.
- When day trading with leverage, your potential profits and losses are amplified according to the chosen leverage ratio.
Day trading in general works differently depending on where you live. In the United States, for example, there is a rule called the $25,000 rule which prohibits individuals from executing a certain amount of trades per day if their account size is smaller than $25,000.
In other parts of the world, day trading is a free activity and can also be used in accordance with leverage.
In this guide, I will explain both versions and how day traders from different parts of the world can use leverage to day trade different asset classes.
You will learn
Leverage in day trading explained
Leverage in day trading is the use of borrowed money to increase buying power by 10 times, 20 times, and even up to 100 times depending on what leverage ratio you choose.
It is important that you learn to separate these two components.
- Margin = Your own capital
- Leverage = The borrowed capital
Related: Margin trading vs leverage trading
The primary use of leverage for day traders is when short-term trades are taken where the traders scalp a few points up or down in price. Keep in mind that leverage can be used for short-selling as well which gives you the opportunity to make money in both ways.
Through the use of highly leveraged accounts, day traders can make significantly larger profits from very small movements and this is why so many turn to these types of accounts.
When leverage is used in a profitable trade, your profits are amplified in accordance with how much leverage you have used for that specific position. For example, if you use a leverage ratio of 1:100, your profits are increased 100 times.
Your losses are also amplified with the same magnitude and this is where most traders realize the drawdown of using margin accounts.
Below are some articles that I recommend that you read that will help you better understand how losses work when borrowed money is used.
- How liquidation works in leveraged trading
- Is it possible to lose more than you invest with leverage?
- Do you have to pay back leverage?
- A guide to how losses work in leverage trading
The leverage itself comes from a leverage broker which lends out capital at a very low cost to its traders and in return they earn money from increased fees.
The most common type of brokers that offer leverage are CFD brokers, Forex brokers, crypto leverage exchanges, spread betting brokers, and other leverage trading platforms.
Related: Why do brokers offer leverage?
When leverage is used for day trading, the fees are also increased.
Read our guide on leveraged trading commissions to learn the specifics of fees.
Can you day trade with leverage?
Most day traders seek to open accounts with a CFD broker, forex broker, spread betting platform, or one of the best crypto leverage trading platforms when they are looking to increase output.
Most traders also don’t know it but forex brokers have built-in leverage by default.
The only thing needed to get started is to sign up with a leverage broker, send in your KYC documents, and you are ready to start trading.
Since accessing borrowed funds is a simple tool in today’s trading almost any day trader who wants to boost their profitability can open an account with a margin broker.
How does leverage work in day trading?
Borrowing money in day trading works exactly the same way as in any other type of speculative product.
First, you have a broker that provides leverage to its traders after the first deposit as an initial investment.
This deposit is then used as collateral to open larger positions.
Secondly, the size of the position is controlled when the trader chooses the leverage ratio.
Lastly, day traders can only use the leverage when the position is active and has to pay back the leverage once the trade is closed out.
Since day traders typically open several trades per day, they have to borrow capital each time they enter a position.
This can increase the costs of doing business since the fees are also amplified due to larger position sizes.
When the trader scores a profit he or she will realize a larger gain than normal and when a loss is realized it is also amplified depending on the position size.
This way of day trading increases both the risk and the reward so it is absolutely necessary to use a good high leverage trading strategy.
To find out the risk reward ratio of your current setup, try our risk reward calculator.
What is margin requirement?
Every trade that is opened with leverage has two components, margin, and leverage.
The margin requirement is the trader’s own cash that is first deposited into his or her trading account.
Every broker will ask for a minimum deposit as margin requirement.
It is the margin capital that is used to calculate how large the trade size will be combined with the selected leverage ratio.
Suppose you want to know your margin requirement for a position size worth $12,000 at a leverage ratio of 1:60.
Simply divide $12,000 by 60 and you will get $200 which is your margin requirement to open this trade.
The trader’s own cash is typically only a small part of the total value of the trade since most traders use higher leverage ratios.
How to day trade with leverage
The process of getting started with leveraged day trading looks very similar for almost any asset class.
Here is a short step-by-step guide on to begin:
- Find a reputable leverage broker.
- Create an account.
- Send in your KYC documents.
- Make your initial investment.
- Screen the market for a good opportunity and apply your top strategy.
- Select the position size and trade direction (long or short).
- Add your protective stop and enter the market.
- Monitor and manage your trade.
To get a more hands-on tutorial on how to navigate certain market situations see our leverage trading tips guide.
Related: Top leverage trading strategies
Day traders also use leverage to hedge positions.
This is a common strategy to protect the position against unwanted losses.
Examples of day trading with leverage
Below are two examples of how day trading can be done with increased buying power.
In the first example, we will take a look at a standard long position in Apple, and in the second example, I will go through how short-selling works.
Let’s say you want to enter a long trade in Apple worth $24,000.
Your initial deposit is $800, now you need to figure out how much leverage you need to use.
We divide $24,000 by $800 and the answer is 30 which means a ratio of 1:30 must be used.
Related: Leverage trade calculator
Suppose you enter in the morning by 10.00 and within 15 minutes you’ve made a profit of +0.75%.
Once you close this position you’ve made a total profit of $180.
Here is the calculation: $24,000 x 0,0075 = $180
This is the result of using borrowed money to increase your profits in a very effective way.
Keep in mind that at this ratio your liquidation price will shrink and get closer to your entry price.
Assume you want to short Bitcoin with $40,000.
You begin by depositing $1200 into your crypto exchange account.
First, you need to find out how much leverage you are going to need.
We divide $40,000 by $1200 and find out that the correct ratio is 33x (or 1:33).
Related: Crypto leverage calculator
Imagine that you enter your short position around 15.00 and before 16.00 the crypto market has dropped -5,50%.
You buy back your Bitcoin short position and realize a profit of $2200.
Here is the calculation: $40,000 x 0,055 = $2200.
This means that in less than one hour you were able to nearly double your account size with leverage.
In this case, it would also be practical to use our short profit calculator to find out exactly how much you stand to gain when shorting with leverage.
How is day trading buying power calculated?
The calculation for day trading buying power works by combining your margin plus the chosen leverage ratio.
Let’s assume your current cash balance is $300 and you want to use a ratio of 1:55.
To calculate your buying power simply multiply your cash balance and your leverage ratio.
In this case, the total buying power would be $300 x 55 = $16,500.
This calculation works for any asset class as long as you know your total account value and your ratio.
Conclusion – Is day trading leverage worth it?
This guide is a breakdown of how leverage works in day trading and how day traders use this tool to score bigger profits.
The question of whether it is a good solution for you or if it will do more harm always comes down to personal preference and risk tolerance.
If you are a risk-averse trader you can use low levels of leverage to stay safe while trading.
However, if you are comfortable with risk and you are an experienced day trader, you can boost your profitability significantly with the use of leverage.
After reading this guide you will have a good understanding of the concepts involved in day trading with leverage.
To educate yourself further I’ve linked to some good articles below.