Introduction
Leverage is one of the most important tools in CFD trading, allowing traders to open positions that are significantly larger than their own capital. This can increase potential profits, but it also increases financial risks. Understanding how leverage works is essential for successful trading.
What is leverage?
Leverage is the ratio between a trader’s own funds and the total volume of the position that he controls with the help of borrowed funds from the broker. For example, a leverage of 1:20 means that with $500, a trader can open a position for $10,000. This increases purchasing power, but at the same time increases potential losses.
How leverage works in practice
Using leverage, a trader makes a profit or loss based on the full value of the position, not just their own investment. This means that even a small fluctuation in the price of an asset can significantly affect the financial result of the transaction. In case of negative market movements, the broker may request additional funds or close the position (margin call).
Margin Requirements and Risks
To maintain open positions, a trader must maintain a minimum margin level in the account. If the market situation deteriorates and the balance drops below the required level, the broker may forcibly close positions to limit losses. This emphasizes the importance of proper risk management.
Regulatory restrictions and choice of leverage
Different regions set their own limits on maximum leverage to protect retail traders. In Ukraine, the regulatory framework is still less developed, but most brokers adhere to international standards. The size of the leverage should correspond to the trader’s experience and trading strategy: beginners are recommended to choose small leverage.
Conclusions
Leverage is a tool that allows you to increase the efficiency of CFD trading, but at the same time significantly increases the risks. Understanding its mechanisms and adhering to the rules of capital management is the key to successful work in the market. For beginners, it is recommended to start with minimal leverage and first practice your skills on demo accounts.
Sources
https://www.investopedia.com/terms/l/leverage.asp
https://www.plus500.com/en/Trading/Leverage
https://www.cmcmarkets.com/en/learn-cfd-trading/what-is-leverage-in-trading