What Is 1:2 Leverage?

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 1:2 leverage or 2x leverage is.

Key takeaway

1:2 leverage 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 trade without leverage.
The margin requirement for a leveraged position with 1:2 leverage is 50%. Let’s say that you want to open a position worth $5000 with 2x leverage, then you need to make a deposit of $2500.

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 leverage ratio, it means that your profits and losses are increased by 100% as well as your leveraged trading fees.

Another important factor to understand when using this leverage 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 to use 1:2 leverage

To use 2x leverage you first need to find a low leverage 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.

It’s important that your leverage trading platform lets you select a 2x leverage ratio before you start trading, otherwise you might be getting into high leverage trading 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.

2x leverage examples

One example of 2x leverage is crypto leverage 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 leverage, then you would first have to make a deposit of $5000 to be able to afford the margin requirement.

Another example would be trading forex with 2x leverage 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 leverage ratio.

Margin requirements for 1:2 leverage

A margin requirement is the amount of money that a trader needs to deposit into his trading account in order to qualify for open positions.

Each leverage ratio has its own margin requirement and the margin requirement for a 1:2 leverage trade is 50% or half the value of the trade.

This is the general idea of how much your margin requirement is, however, different leverage 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 leverage ratio and you want to open a position size worth $8000, then your margin requirement would be $4000.

What is the difference between 2x leverage and 1:2 leverage?

The difference between 1:2 and 2x leverage is the way that the leverage ratio is expressed. Technically there is no difference between the two.

2x leverage 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 leverage 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 to trade 2x leverage

There are plenty of options for traders who are looking to trade with a 1:2 ratio, including crypto leverage exchanges, 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 leverage 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 leverage 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 leverage 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.

How 2x leverage affects losses

The biggest difference between trading the spot market vs the leverage market is that at a leverage 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 2x leverage, 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 trading losses work.

Comparing 1:2 leverage

When compared to other ratios, 1:2 leverage is the lowest ratio that can be used with borrowed money.

The next step down the ladder would be 1:1 leverage 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 leverage.

Remember, each time you increase your leverage, 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.

How it affects lot size

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 leverage 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 your 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 leverage 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.

Margin risks and liquidation

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 leverage ratio, the risk of a margin call and liquidation is much lower than if you were to trade on a higher ratio.

FAQ

Is 2x leverage the same as doubling your trade size?

Yes, it is. Two times leverage means that you are doubling the amount of money you have deposited into your forex account.

What happens if I exceed my margin requirement at 1:2 leverage?

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.

How can I calculate my profits when using 2x leverage?

Always calculate your potential profits based on the full value of your position size.

Is 1:2 leverage suitable for beginners?

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.