Leverage in CFD Trading: How This Affects You Trading Results & What About Margin?
Leverage is one of the several reasons why CFDs are are different to other trading instruments..
Different CFD brokers will give different amounts of leverage. And different CFDs will requrie different amounts of margin ranging from 5-10% to 80% or more.
So what does for example 10% leverage mean?
It means that with a $1000 float, positions totalling $10,000 is possible if full leverage is used, in comparison to $5000 if there is 50% leverage.
But this does not mean that you should use all the available leverage as the more leverage is used, the more risk there is in trading. The risk comes from 2 sources.
1) The risk of margin calls: If you have a margin call and cannot put more funds in then you may be stopped out of your positions by the broker. Typically the trade has gone against you and hence a margin call, and when stopped out in this situation when the trade is at the moment against you means a loss on all these positions.
2) The results of a CFD trading strategy or system are magnified. While gains during profitable trades are bigger, so are the losses when trades go against you. If they are too large, and especially if you have inaedquate risk management skills and inappropriate trade sizes, you could lose more than your cash float.
The worst case scenario with leverage is that you can lose more than your original cash float.
This will be even more likely if for example there is a lack of money management rules in trading or you’re not using stop losses, or due to events such as stock falls to zero or to almost zero, or a drastic change in stock price due to a takeover or other event.
The use of leverage must be used carefully considered as they have consequences.
And position sizing is related to leverage and your risk exposure.
All trading involves a high risk of financial loss, and the information on this site is for general information purposes only and is not financial advice in any form. Seek your own financial advice before taking any action.
All forms of trading involves risk of financial loss.
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