We have frequently received emails from people who were not very clear about how leverage works in CFDs.
Once and for all we have chosen to provide a little guidance on leverage to understand how it works but above all to learn how to make the best use of it.
Nowadays most online investors are attracted to the CFD tool, because every platform that markets this tool, offers good leverage to invest.
To start investing with CFDs you definitely need the capital available, but not as high as you think.
Every platform that you choose to use has minimum deposits to respect, this means that you will need to deposit money to use the platform.
Know that the platform will not hold it, but it will be made available to you when you choose to start a trade.
So if a platform requires a minimum deposit of €100, you will have to pay €100 to the platform, but you will have the opportunity to invest the full amount for your trades.
How experienced does a trader need to be in order to use the Lever?
You are never too prepared when you decide to use the Lever.
But to get to the use of Leverage on one of the best online trading platforms, a first theoretical training will be essential.
In fact there are many investors who underestimate the risks of CFDs, we have noticed that often and willingly you do not understand the impact of leverage in CFDs and how it can devastate an investor.
We do not want to scare you, but without knowing how leverage works the risk of losing money is rather.
Many people are convinced that it is possible to enter this world and rely only on “chance” on “luck” and do not take into account the risk factor, the only factor helps you to lose all your money, without realizing it.
There are many traders who close at the end of the month with a break-even or a slight profitability because they do not have the right skills.
Know that at the same time there are others who are able to make good returns using leveraged CFDs.
Are CFDs Risky Instruments?
Let’s be honest, CFDs are considered derivative instruments with a very high rate of risk.
They are often used by traders to take market positions with a short duration and are resold or bought at very short intervals.
Leverage plays a key role in CFDs and risk.
If you decide to try online trading with higher leverage, you are up against two distinct possibilities: on the one hand you can make very high profits, and on the other hand you risk losing the money invested much faster.
How To Start Using Leverage?
To start using leverage you first need to make a deposit on a platform, as we have already mentioned and choose currency pairs, stocks, cryptocurrency, commodities and more.
Know that when you buy with CFD trading on stocks with 10% leverage (i.e. 10X), to give you an example, you can make a 100% profit when stocks go up, even if their value has only gone up by 10%.
However, this also happens when the shares go down, so if the shares go down 10%, it is as if you lose the 100% amount, so you risk losing the initial amount.
A leverage of 10x means that every trade you make could be 10 times the profit and 10 times the loss compared to what you are actually investing.
The mistake that most people make is that they do not control the leverage, so they do not have a real sense of how much they could lose by using it.
On the contrary, with more knowledge you will have better control of the risk, so even on a psychological level a trader will have to know how to manage everything correctly.
Learn more about trader psychology applied to trading!
The Power of Leverage
Leverage has many advantages and many disadvantages, among the greatest advantages there is the opportunity to earn a lot of money by investing small amounts, on the other hand, however, a very large defect prevails, incorrect use of leverage can result in serious losses for those who invest.
Usually the level of leverage offered by a CFD trading broker is able to amplify the movement of the action, as much positively as in the negative world.
Leverage in CFDs has tremendous power to allow securities to be traded on the sidelines, which means a larger excursion into the stock and currency markets, with a reduced capital outlay.
So this allows each trader more exposure than they could actually get with traditional securities trading, without the help of leverage.
However, even if you need a lower deposit to open any trade, you are still exposed to the movement of CFD prices.
Put much more simply, even if the capital to be invested through leverage is reduced, the trader is still exposed to price movements.
Example Of How Financial Leverage Works
When you decide to trade a CFD with a margin of 10%, it means taking advantage of 10 times more market exposure, this means that a deposit of €100 equals a market exposure of €1,000, i.e. opening positions up to $1,000.
When you decide to trade a CFD with a 5% margin, if the price of an asset goes up 2%, a 20% gain may arise for the underlying asset.
But if the price falls by 2%, this would cause a loss of 20% of the amount deposited for opening the position.
Initially it is very important to fully understand how leverage works, as well as how CFDs work 360 degrees.
Knowing how to leverage your trading capital is fundamental but it is often a concept that many people underestimate and find difficult to understand.
Some people open a trading account and start trading by losing their money right away, not giving themselves the opportunity to learn how trading really works.
So we cannot expect to “guess” whether an asset will rise or fall, but we need to study technical analysis and fundamental analysis to understand the essence of trading.
The Mistakes Made With Actions And Leverage
Many CFD traders place their focus on leverage, but they ignore that leverage is a double-edged sword, especially when used without experience.
One of the most common mistakes made by inexperienced traders is buying stocks.
If Marco invested 10,000€ of his savings in the stock market and grew by 10%, he would earn 1,000€;
If Marco would deposit 10,000€ into a CFD trading account, set a 10x leverage and their value increased by 10%, he would earn 10,000€.
So, What’s More Convenient?
Leverage is a great tool if you are making good trades, but a terrifying thing if you move badly and don’t recognize the importance of money management.
If you start trading recently, you don’t realize that leverage can work both for you and against you.
But know that with CFD Trading when you lose money, everything is under control, because at any time you can decide to close a trade.
If your choice is to risk as little as possible, you can also choose not to use leverage, which means that by opening a 100€ account you can open positions for 100€ and not for 1000€, as you could have done by setting 10x leverage.
The Trader’s Profits And Losses With Leverage
The trader’s profits and losses are based on the total value of the contract after a certain transaction is closed.
This means that profits can certainly be greater than the initial outlay required by the broker to initiate a trade.
On the other hand, however, the loss can also be much larger than the amount with which the trade was opened.
In practice, there are two main factors that govern your profits and losses.
The price certainly plays a very important role, at least as much as the role of the amount you decide to set to open a trade.
By observing and analyzing these two factors together, you can see how much money you could earn and how much money you could lose.
Is It Possible To Trade Safely With Leverage In CFDs?
Surely a method that does not allow you to take risks does not exist by trading with leverage.
However, you can protect yourself against the limit you are willing to lose on each individual trade.
This way you can also see what is the maximum you can set to start a trade.
If you find that with the leverage you are using, you are not safe, simply reduce it, to reduce the risk you are exposed to.
There are many trading brokers like 24option, eToro and XTB that offer higher leverage only for users who have a higher level of experience.
There is nothing wrong with trading CFDs, the big problem lies in the way they are used by experienced traders, but especially by beginners.
You always have to be aware of what you are doing, what you could earn and what you could lose.