Leverage trading allows investors to enhance their position size, which increases both profit, and loss, potential. In this tutorial, we’ll cover the definition of leverage trading with examples, tips on strategies for beginners, plus a guide on how to get started. Is trading with leverage worth it? Read on to find out.
Alternatively, jump straight to our guide to brokers with the highest leverage to get started.
What Is Leverage Trading?
Leveraged trading is the process of borrowing funds from a broker to increase your position size, thereby magnifying potential results (whether profit or loss). Traders using leverage are looking to gain exposure to a market beyond what their deposit amount would usually allow.
After a leveraged position is closed, the borrowed capital is returned to the broker and the trader keeps any profits. However, there are also some key risks to note. While profit potential increases, so will any losses.
Leverage is often written as a ratio e.g 1:10 or 1:5. Alternatively, it can be written as a multiple e.g 2x, 5x, 10x, 50x or even 100x. Note that leverage is capped in the EU, to 1:30 (30x), except for professional traders.
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Взяв в качестве примера последний пример, это означает, что если вы внесете депозит в размере $100, вы сможете торговать на сумму до $10 000.
Пример торговли на маржине
Давайте рассмотрим реальный пример применения торговли на маржине на товарных рынках. Если текущая цена золота составляет $1 200, а розничный трейдер считает, что цена вырастет, он ищет возможность открыть позицию, чтобы максимизировать прибыль.
Брокер предлагает кредитное плечо 1:5, что означает, что трейдер может занять до 5 раз свою сумму депозита. Таким образом, если он внесет $2 000, он сможет открыть позицию на сумму до $10 000.
Если цена вырастет до $1 250 и трейдер продаст свою позицию, он может заработать потенциальную прибыль в размере $416. Если бы трейдер открыл позицию только наличными средствами, его прибыль составила бы всего $75. Обратите внимание, что при обратном движении цен убытки также были бы больше.
Многие брокеры предоставляют бесплатный калькулятор торговли на маржине, чтобы помочь инвесторам рассчитать эффект риска / доходности от их сделок.
Торговля на маржине против торговли без кредитного плеча
Обычная ситуация для трейдеров – выбор между торговлей с кредитным плечом или без него (торговля без кредитного плеча). Торговля без кредитного плеча – это когда трейдеры открывают позицию по текущей цене, что требует наличия у них всей суммы на счету к дате исполнения. Если у индивида нет средств, биржа не позволит ему открыть позицию.
Так почему бы кто-то не выбрал торговлю без кредитного плеча?
Spot trading is considered to be a lower risk option as you are only trading with the available balance in your account. On the other hand, leverage trading involves borrowing funds to open a position, which may lead to potential losses exceeding your deposit amount.
However, the primary disadvantage of spot trading is that your profit potential is limited by the amount of your capital. When deciding between leverage and spot trading, it is crucial to consider your risk tolerance, trading knowledge, and experience, along with the amount you can afford to lose.
Leverage Trading in Various Markets
Leverage trading can be utilized in a wide range of popular financial assets, such as forex, stocks, cryptocurrencies, commodities, exchange-traded funds (ETFs), and indices. However, the amount of leverage offered may vary depending on regulatory limits and the asset’s volatility. For instance, most authorities allow forex leverage trading up to 1:30, whereas cryptocurrencies are subject to much lower limits, usually around 1:2 or 1:3. Leverage trading on stocks is typically permitted up to approximately 1:5.
Advantages of Leverage Trading
- Negative balance protection is available with many brokers
- Offered by many regulated platforms
- Suitable for various trading strategies
- Access to higher value stocks
- Potential for magnified profits
- Greater market exposure
Disadvantages of Leverage Trading
- Can amplify losses beyond the initial available capital
- Profits are subject to regulations on taxes
- Restricted leverage for retail traders
- Fees and interest can negate profits
- Unpredictable outcomes
Regulations on Leverage Trading
Regulated brokers are subject to local laws regarding the leverage limits they can offer.
These regulations are implemented to safeguard consumers against significant losses.
- USA – The National Futures Association governs leverage and margin rates for American traders. Forex trading leverage is limited to 1:50, while stocks are capped at 1:4. Kraken, Coinbase and Binance.US are among the few exchanges that have licenses to offer crypto leverage trading in the USA. Kraken provides leverage of 1:5 with trading fees that range from 0 to 0.26%.
- Australia – The Australian Securities and Investments Commission (ASIC) lately reduced the maximum leverage from 1:500 to 1:30 for forex trading and 1:20 for minor and exotic trading pairs. Crypto assets are limited to 1:2, and shares are capped at 1:5.
- India – In India, the Securities and Exchange Board of India (SEBI) declared that all brokerages must halt intraday leveraged products with full effect by August 2021. This restriction will compel day traders to rely on spot trades using only the available capital they have.
- UK & Europe – Under the Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA), leverage is limited to 1:30 on forex, 1:20 on shares and indices, and 1:2 on cryptocurrencies. Note that the FCA has barred the sale of crypto derivatives for retail traders in the UK, such as options, futures or contracts for difference (CFDs).
- Singapore – The Monetary Authority of Singapore (MAS) has set the forex trading leverage limit to 1:20 (from 1:50) in 2019.
Cryptocurrencies in Singapore are neither regulated nor classified as legal tender or securities.
Leverage Trading Strategies
If you have decided to use leverage, it is crucial to choose a strategy that can help manage risk and increase the chances of earning a profit. Listed below are some of the most popular strategies:
Swing Trading Strategy
Swing traders take advantage of short to medium-term movements on both sides. This approach aims to capture greater price shifts than possible in the intraday time frame, and it can be enhanced with leverage. However, overnight positions are exposed to the risks of news outbreaks that may cause price gaps when the markets are closed, and you may not be able to exit your position.
Day Trading Strategy
Day traders buy and sell their assets within one trading day. As price movements within a short period are likely to be small, it is common to use high leverage. Day traders may also save on overnight (rollover) fees that are applied when a position is maintained after hours.
Scalping Trading Strategy
Scalping involves making a high volume of trades and holding them for a very short time period, usually just a few minutes. The aim is to profit off small intraday price changes but to do so frequently enough that profits rack up.
Scalpers typically use very high leverage to maximise price movements. See our list of the best brokers with high leverage. Because scalping requires a full-time commitment, decent capital, and proper training, it tends to be used by professional traders and experienced retail investors who can access the highest leverage rates.
Professional Leverage Trading
Retail traders are limited to rules set by regulatory bodies. On the other hand, professional trading accounts often have access to additional benefits, including significantly higher leverage. Each broker will have different requirements to open a pro account but you may already be eligible.
Generally, traders must prove sufficient professional experience through tests or interviews. IG requires professional clients to have worked in the financial sector for at least one year in a role with specific trading knowledge.
Additionally, having a portfolio of financial instruments is important i.e. forex, stocks and mutual funds. Some brokers require you to prove that you own capital of $500,000 or more. They may also require you to be highly active, having placed a number of significantly sized trades within the last year. For example, JFD Bank requires traders to have executed an average of 10 positions per quarter in the last year.
While professional accounts are rewarded with fewer restrictions, the protection offered to retail traders is removed.
This includes negative balance protection or compensation. Therefore, before applying for a professional account, ensure you understand the pros and cons.
How To Start Leverage Trading
Pick A Broker
There are multiple factors to consider when selecting a broker with leverage.These include choosing the asset, fees, account benefits and regulation.
Open An Account
Once you’ve chosen a broker, you can open an account.Check whether you qualify for a professional trading account so that you can access higher leverage if required.
Whether you’re new to trading or highly experienced, traders can practice on a demo account first to ensure they’re comfortable with the platform functionality.Investors can also test new leverage trading strategies before using real funds.
Once you’ve found an opportunity, place your trades and choose suitable leverage.Go long or short depending on your strategy and place your stop loss/limit orders at your desired conditions.Use a risk, liquidation or profit calculator to help with this, these are offered by many of the top brokers. BitMex and Binance both offer a number of crypto calculators to help manage trades.
Once you’ve monitored and closed your positions, your broker will take any debts from the capital owed and you’ll receive your profits.
Some brokers provide a guide or tutorial that will have leverage trading explained on their platform.
OTC vs Exchange Leverage Trading
You can conduct leverage trading over-the-counter (OTC) or through an exchange.
Both marketplaces allow securities to be traded but are different structures with pros and cons.
OTC markets are an informal or ‘decentralised’ (DEX) market where participants trade assets like forex or stocks directly with a network of one or more dealers. While fewer regulations open up a range of opportunities, this makes for a less transparent trading environment. Dealers in the OTC market act as market-makers. They quote prices at which they are willing to buy (bid) or sell (ask) and negotiate execution prices with participants over the phone or email. Notably, quote prices are not necessarily consistent across every customer, which means markets are not being traded equally. Liquidity also fluctuates widely in OTC markets as it lacks buyers and sellers.
An exchange is a centralised marketplace to trade financial instruments such as the New York Stock Exchange (NYSE) or the International Securities Exchange (ISE). The primary difference of an exchange is that they impose rules that govern trading and information to ensure a fair and organised environment. It also centralises the reporting of bid and ask prices, allowing transparency for everyone in the marketplace. Every company trading on an exchange must meet specific listing requirements, including financial and audits reporting and minimum capital requirements.
Final Word On Leverage Trading
In this article, we’ve explained leverage trading and the risks involved.
Many regulatory bodies around the world have tightened restrictions to protect retail traders from undue risk when trading with leverage. However, when done right, it can open up a number of interesting opportunities with little capital. Before you trade with leverage, make sure you learn the basics and practise with a demo account.
Is Leverage Trading Gambling?
No, leverage trading or any forex trading is not gambling. It is classed as a financial service and is therefore regulated by the relevant authorities, such as the FCA, ASIC, CySEC or CFTC. However, trading using leverage does carry risk which could lead to losses. Traders should be conscious of risk management strategies.
Is Leverage Trading Halal Or Haram In Islam?
It is likely that leveraged trading is halal but it depends on how you use it. Leverage is similar to a loan from a broker, which is permissible in Islam under certain rules. If you’re concerned that your broker is offering Haram leverage, consult your local religious leader for advice.
How Does Leverage Trading Work?
Leveraged trading (or trading on margin) means funds are borrowed from a broker to increase position sizes beyond what your available balance would usually allow.
The amount of leverage is usually expressed as a ratio i.e. 1:10. After closing the position, you will repay the broker back the debt, taking the profit on the larger position size.