What Is High Leverage Trading?
High leverage trading in the financial markets works in the same way as normal leverage trading with the exception that the leverage ratio is much higher. An example of a high leverage ratio is 1:200, 1:500, and even 1:1000 with the latter being at the end of the scale offering huge amounts of capital to traders.
It is a common practice among both retail traders and professional investors, however, the way you use it is what is going to affect your results at the end of the day. Most beginners are drawn into the game with one thing in mind only, big gains.
It is true that high leveraged investing can produce incredible returns it should also be mentioned that large returns are always followed by high risk but if you know how to position yourself and have spot-on risk management you can lock in trades well in the thousands of dollars daily.
Today, I will break down everything there is to know about trading with high leverage and at the end of this guide you will have a much better understanding of how it works and if it is a good choice for you.
It is not for the faint-hearted but for those of you who can withstand the pressure and the risk, this is an opportunity that you can’t miss. Use a high leverage trading strategy and read this article to set yourself up for success.
What does high leverage mean in trading?
High leverage trading means that you trade the financial markets (forex, crypto, or stocks) with an extreme leverage ratio of up to 1:1000 where your initial investment, or margin capital, is multiplied a thousand times.
High leverage trading requires less margin capital, or collateral, to trade large positions.
For example, should you make a deposit of $200 in your account and use a ratio of 1:1000, you will be able to control $200.000 of capital in an open position. That means that you can open a position worth $200.000 with only $200 in your margin account.
It essentially means that you borrow a lot of money from your brokers, exchange, or trading platform to trade with a much higher volume than what is offered in the traditional spot markets.
Trading on high leverage is possible in most tradeable assets but is most popular in forex, stocks, and crypto leverage trading where the operators have special deals with third-party liquidity providers to offer higher ratios and more capital than what is traditionally available.
This type of investing is very rewarding when you get it right and when you make a profit you get to keep all the gains from each position. On many occasions, you can double, triple, or even quadruple a small account in one single trade.
This doesn’t come without risks of course. Using a ratio of over 500x will significantly increase the risk of loss since the distance to your liquidation price is reduced to only a few points from your make-it-or-break-it level.
Related: Calculate liquidation price
But why do brokers offer high leverage while knowing the risk?
The answer is that it is up to each trader to be responsible for his or her own risk and the operator cannot control how you trade.
What is considered high leverage?
In general, a ratio of 1:100 leverage and above is considered high although there are different industry standards depending on the operator, the market, and the community. CFD leverage can get very high as most of these operators have off-shore companies that operate without regulation.
However, using a ratio of more than 100x your initial deposit will significantly increase your buying power.
But what leverage ratio is too high?
In the table below you can see what market has the highest risk when traded with high leverage (ratios above 1:100).
The more volatile the asset class is the higher the risk is and cryptocurrencies are seen as having the highest volatility and are therefore the riskiest asset class.
A ratio that is too difficult to handle is considered too high but that is to be decided by each trader. Some professional day traders are comfortable with extreme ratios and can maneuver the markets perfectly even when under extreme risk.
As long as you are in control and have a proper understanding of all the moving parts you are free to leverage up as much as you want and as long as there is a cover for it you can use any ratio you want.
The best leverage level for beginners is usually low but if you have decided to increase your ratios I recommend doing it slowly since each new level will surprise even the bravest investor.
With our leverage trading calculator, you can see exactly how much capital you need to put down to open a specific position at a certain leverage ratio. For our crypto traders, use our crypto leverage calculator to see how much margin capital you need to deposit for each ratio. When you trade crypto on high leverage it is even more important to calculate your risk in advance.
How to trade with high leverage
High leverage trading can be done in several different ways but there are some things you need to think about before you start out to trade successfully I recommend following these tips below:
- Find a regulated broker platform or exchange.
- Choose a broker or exchange with the lowest fees possible.
- Make sure the operator has negative balance protection.
- Only deposit the money you can afford to lose.
- Use proper risk management.
- Practice your top leverage trading strategies.
- Always use a stop-loss.
- Choose a leveraged contract that suits your strategy.
- Use isolated margin.
- Only trade one market at the same time.
These tips will help you avoid some of the biggest mistakes that new traders make.
You need to operate very carefully when using high ratios since the risk gets multiplied when your position size increases and the smallest mistake can result in total liquidation of your account.
When to use high leverage
The best time to use high leverage is when you have spotted a perfect trade with a skewed risk/reward ratio in your favor. The trade has to be one of your favorite setups that you are very comfortable with.
Use our risk reward ratio calculator to find out if you are within risk limits.
The optimal situation is a positive or negative breakout that is followed by heavy volume.
This will ensure that the market is pushed in your direction with very few pullbacks that could possibly risk your trade entry.
A breakout scenario is also one setup that has the highest probability of success which is needed for your trade to succeed.
Then of course, to trade with high leverage you need to be well prepared for the task, you can’t enter the market without knowing what to expect.
Use high leverage more frequently during these market conditions:
- Strong breakouts
- Broken support/resistance levels
- A very strong trend in either direction
- Extreme negative sell-off on high volume
These setups will ensure that you have a tailwind and that your position at least has a good start after entry and it is important that you recognize these situations if you are going to use a high ratio.
What you want to see is a market that is in a one-way mindset without any pullbacks. This is because your entry has to be on point to not risk that the market comes back to stop you out or liquidate you.
High leverage trading strategy
Some of the most effective strategies are the ones that are going to swing the probabilities in your favor and give you a near-perfect entry.
Every time you enter the market you need to think about the risk of a pullback. Pullbacks are the nightmares when using high buying power simply because they can shake you out of your position in a heartbeat.
Before you enter, you need to be as sure as possible that the price will continue in your direction immediately after you click buy or short-sell.
This is how you do it.
1. Enter on breakouts
As previously mentioned, breakouts are the bread-and-butter trades for high leverage trading and it really pays off to learn how to spot them.
A true high-quality breakout does not return to your entry price once you have entered and this is one of the safest ways to trade with large positions.
To spot a real breakout you first need to identify the build-up.
There should be a decent-sized trading range going into the breakout where a lot of traders have been accumulating their positions in both directions.
A larger trading range will also be prone to have a lot of stop-loss orders just outside of the range which always gets triggered and adds fuel to the fire.
It doesn’t matter if the price breaks to the downside or the upside, as long as it is followed by high volume and an increase in volatility.
The first bar should be a candle that is big with a full body, either green or red.
If you have managed to enter early, stay in the trade and squeeze out the profits.
2. Always use market orders
The market order is the best friend of any trader who is involved with large positions and high volatility markets.
They usually cost a little bit more to execute due to higher fees but it is definitely worth paying for.
Market orders let you enter at your own will and as long as the matching engine of your broker is good you will get filled very close to your entry price.
This lets your control the entry exactly as the market makes its move.
There won’t be any time to enter with a limit order or a stop limit order so don’t even try to enter the price manually because the move will be well over before you hit the buy button.
Remember this, market orders give your control to hit the market exactly at the best time to assure a near-perfect entry.
The more you trade the better you will understand that market orders are made for fast-paced markets where the trader needs full control over the entry and exit.
A good charting interface free of lag is also a technical requirement but the most important thing is to use the right order type.
The stop loss order should be automatically added to your entry and if your broker or exchange can’t handle that you need to change operator.
3. Buy the tops and sell the bottoms
For most new traders, this is completely counterintuitive as most beginners want to buy the bottoms and sell the top because they think the price is too low or too high.
This is where all beginners are wrong, and I will tell you why.
It is nearly impossible to hit the entry of a bottom trade or a top trade. You can keep trying but you will get stopped out over and over again.
Instead, you want to look for momentum in one direction, and where can you find this momentum?
The best way to find true momentum in any given market is when both buyers and sellers become united in one way.
This usually happens at the top of the range when the market breaks out to the upside or at the bottom of a range when the market breaks down to the downside.
This is because when a level is broken, to the upside, for example, all the traders that were shorting that level become buyers because their stop orders become buy market orders.
All the buyers from earlier add to their position which creates further buying.
The opposite happens when the market breaks a level to the downside, everyone becomes a seller.
This is the best high leverage strategy if you want to guarantee that you don’t get stopped out immediately after entering.
4. Always follow the big money
The big money is mostly the big funds, large investors, and the mass of traders in general.
The big money always leaves trails behind and it is not difficult to spot it once it starts moving.
It is always followed by high volume and it is usually one-sided. This is because when the large funds and the big investors commit to a position they don’t hesitate, they just do it.
They have planned the trade for a long time and when it comes to executing the trade they are not thinking twice.
Therefore, when you see a breakout happen on increased volume you know it is a good idea to enter the market and follow that money.
As you learn to piggyback on volume spikes you will also notice how weak most setups are that don’t have enough volume attached to them.
Volume is like petrol for your car, it needs it to keep going, and without it, it stops.
Always confirm your trade entries with volume, if there is none, you should get worried and tighten your stop-loss.
5. Move your stop-loss to break even immediately
Since highly leveraged positions can throw you out in a matter of seconds it is very important to raise or lower your stop-loss order to break even as soon as your position is in the green.
If you don’t do this you will get wiped out more often and you will give back money to the market.
The truth is that most of your trades will not be successful but that doesn’t mean that you need to lose money.
A break-even trade is a good trade, as long as it doesn’t cost you anything.
This gives you another opportunity to try again until you hit your daily winner.
Everyone is looking for their daily winner that will make up for all the small losses earlier in the day.
You only need one good daily winner to profit from trading and when you trade a leveraged market you can make it very far with only one positive trade.
Until you nail that trade, remember to raise your stop-loss as soon as your position is positive.
6. Enter the market in smaller parts
Here is a strategy that is incredibly powerful that most new traders have big problems with executing.
Why is it good to enter the market in smaller parts and why not go all in from the start?
While it is true that some setups require an all-in commitment from the trader, many trades can be executed in parts.
The reason for this is that sometimes if you are not 100% sure that the market is giving you the right signals but you still want to test the waters you should enter in smaller parts.
For example, if you enter with 25% of your total position size and the market moves in your direction you are free to add more size without getting hurt.
Once the market moves further you can either enter another 25% lot or the remaining 50%.
Yes, it is true that you lose out a little bit by not entering with your full size but if you are not sure where the market is heading you can still make money while risking less.
For every move up, you increase the size of your position, and at the same time, you tighten your stop-loss.
This way you get to keep all the profits and there is a chance that the market gives your more.
If you trade like this when you are insecure you will be surprised to see how often you are right.
For more information please read our best leverage trading strategy and for crypto traders please see our best crypto leverage trading strategy.
Is it good or bad?
Do you lose more money with higher leverage?
A highly leveraged trade can be both good and bad depending on how skilled the trader is. As you will soon see, most leveraged positions are either rewarded or punished depending on the quality of the entry.
In order to have a good entry, you need to read the market very well and understand the underlying forces that are pushing the price either up or down.
A perfect entry will guarantee a good start and most often a profitable trade. This is due to the small wiggle room to your stop loss level or liquidation price.
You can open a position and expect it to behave in the same way as your would with a low leverage trade. This style of trading is much more fast-paced and either you enter perfectly and score a profit or you lose your margin.
Below are some positive and negative aspects of high leverage trading:
|Profits are made very quickly||Fees are more expensive|
|Patience is rewarded with windfall profits||Market moves can surprise the trader if not prepared|
|Rewards good entries||Overtrading is deadly|
|Adding to a positive position is highly recommended||Can be very stressful if the trader is not used to losing money|
|Short-term traders benefit more||Punishes poor entries immediately|
Use this table to see if you are cut out for the task and keep in mind that you can always start on a demo account to get a feeling of what it’s like. It is also worth mentioning that high leverage and long-term investing are not a good combination.
Should you trade with high leverage?
It would help if you traded with high leverage as long as you understand the process and trust your own trading strategy 100%.
If you are unsure, starting out on a demo account is a good idea to see how you would perform in a test scenario.
Once you feel comfortable with the high risk you can move on to a live environment.
It is worth mentioning that paper trading is not the same thing as investing with a live account since there is no risk factor and you can never tell how you will feel once your real money is at stake.
There is also no reason to rush into the highest ratios immediately and you don’t need to make a large commitment of capital if it is your first time trying it out.
Start with a few hundred dollars or euros to see how you feel.
However, high leverage trading can be extremely rewarding and profitable when you learn how to operate your positions so I think every trader should test it out and judge for themselves.
Crypto traders that are getting into high leverage trading should evaluate their leverage ratio first. Our guide on how to choose crypto leverage ratio will give you good insight when starting out.
What other traders ask
This depends on the market and the broker your choose. Some forex platforms offer ratios up to 1:5000 while other unregulated off-shore operators offer even more.
The sign that you can’t handle your leverage is when you get liquidated completely or when your get stopped out very frequently. The solution is to use a lower ratio or try a different market that is less volatile.
For a skilled trader, it is very profitable and many successful traders can make several thousand dollars while day trading only one market and one setup.
This is both true and false and here is why. The fee you pay is directly tied to your position size and while high leverage provides more capital to use in the market, you don’t have to use all the buying power given. You can trade a small position while being highly leveraged and your fees will not increase at all. The bigger your position size is, the more commissions you pay.
Yes, it is recommended to day trade with leverage for traders who scalp the market and rely on very small price movements. Also, most brokers and exchanges charge a management fee which is paid every day at midnight as interest. If you only day trade and close out all your positions before the day ends you don’t have to pay extra fees.
In this article, I have explained the concept of high leverage trading so that anyone can understand it. I have covered some basic principles and information that I think every beginner trader should know. Some of the aspects I have covered are:
- The meaning of high leverage trading
- How to use it
- The best time to use it
- Top strategies
- Overall thoughts
When you have read this guide you should have a good understanding of the concept and you will be ready to try it out for yourself. I recommend starting out slow and following the steps I have outlined in this guide, good luck. In our guide on the best forex leverage for beginners, we discuss more on how to avoid liquidation by properly selecting your leverage.