Table of contents:
- 1 CFD trade lever and margin example:
You want to know how the CFD leverage works and how the margin is calculated? – Then you are exactly right on this page! You will find all important information about “CFD trading with leverage”. With more than 7 years of experience in the financial markets, I will go into the risks and opportunities and share my experience with you.
Explanation and definition:
CFDs (Contracts for Difference) are leveraged financial products, which are underlaid with leverage. The leverage can be different and can be adjusted by the broker. Through a lever you need a certain security deposit (margin) to trade a larger amount on the stock exchange – “The position is leveraged”.
Advantages of CFD leverage:
- Trade higher positions on the market
- The potential gain may be higher
- Trade any market with little capital
CFD trade lever and margin example:
The leverage multiplies your own security deposit (margin) up. This means you only need 1/30 of your account balance to trade a larger position x 30.
Margin 100€ x 30 leverage = 3000€ position size. CFDs allow the trader to trade higher positions with less capital. This is necessary because some assets fluctuate only a few percentage points per day.
In my experience, the trading account should never be completely exhausted by the margin, because a margin call can quickly occur. This means that the CFD broker needs another security deposit for the positions to keep them open. If your trading account does not have the required margin left, the broker will force the position to close.
Make a note for CFD trading:
- Leverage is set by the CFD broker and is also optional
- The lever multiplies the margin (security) up to the real position size
- Free Margin and Used Margin is visible in the trading account
- You can trade more capital than you actually own through the leverage
- Determine and calculate the right CFD leverage
You should now know what a lever is – now it is time to determine and calculate it correctly. In principle, you do not have to calculate or determine the lever at every position. This is completely unnecessary and only wastes time.
Most providers have a fixed leverage on the assets. It is more important to choose the right position size for your account, because the leverage makes it possible to trade larger positions, which of course have a higher risk.
In the picture below you see the order mask for opening a position:
Altogether this means nothing else than “a lot is possible, but it must be nothing”. By choosing his position size, the trader determines how he can use the leverage. However, a low lever can automatically prevent the account from being overleveraged.
This is how the CFD leverage product works:
The picture above shows an example from the order mask of XTB.
- The size 0.10 corresponds to a contract value of 10,000€ in EUR/USD
- Size and contract value vary from asset to asset
- On the right you can see the margin (security deposit)
- You must have this security deposit on your account (+50%) for a position size of 0.10
- The position size must be calculated by the trader himself
The leverage product should first be tried out in a demo account. There you can practice how high the position sizes have to be set. However, you should know in advance how much money you want to risk from your trading account per trade. The traded contract size does not mean that you can lose or gain that much money.
The contract size fluctuates around a certain value (price). The more the price fluctuates and the larger the contract size, the higher the charge on the trading account can be.
These assets are traded with leverage:
- Forex (currency pairs)
- Raw materials
- Crypto Currencies
Make sure that you use a reputable CFD broker that excludes the obligation to make additional payments. When trading leveraged products, it is extremely important to have a reliable partner on your side. That is why I recommend regulated and verified providers in the table below. Trading with leverage products can be tested with a demo account:
Which CFD leverage should be used?
Many newcomers ask themselves, which levers should be used when trading ? – This question is quite easy to answer. Leverage only determines the amount of collateral required for a position.
In my opinion, the full use of the leverage is much too risky and in most cases ends in a catastrophe. The lever allows you to trade larger positions. If you trade too large positions and the market moves against you, your own capital can quickly go to zero.
You should remember these basic rules:
- The higher the leverage, the lower the margin (margin) for a large trading position (risk)
- The smaller the leverage, the greater the collateral for a large trading position (risk)
HIGH LEVERAGE CFD – DOES THAT MAKE SENSE?
Many traders cannot correctly assess the risk in the market. High leverage often tempts them to gamble. In my trading history I have been able to gain experience with this topic. A high leverage can often risk more than 100% of an account per trade.
For example, scalpers need high leverage because they trade small movements with large positions. Long-term trades with large stop losses do not necessarily require high leverage.
Trading with very high leverage only makes sense if you want to trade small market movements with a low stop loss. The position size is therefore very high.
Leverage and risk should not be underestimated:
- A high leverage quickly leads to gambling!
- The leverage should be adapted to risk management or the application should be adapted
- It is not recommended to risk more than 5% of the total capital in one position (position with stop loss)
- Only invest capital that you can also lose
CFD Trading Without Leverage Is Useful for Some Financial Products
Trading without leverage is useful for assets that move quickly. I am talking about crypto currencies (Bitcoin, Ripple, etc.) . These assets fluctuate several percent per day. A position with leverage is in most cases too large for your account.
However, for some speculators, the leverage can be a miracle. Some traders take a very high risk with high leverage and make huge profits. In practice, however, only very few traders succeed in this and should be avoided by a beginner.
My conclusion on the important topic of CFD Leverage And Margin:
Every trader should have dealt with this topic, because leverage is essential for trading CFDs. It gives traders the opportunity to trade larger positions in the market with only a small stake. This is very important because otherwise there is hardly any profit/loss on most assets.
It is important to be aware of your own risk when trading and not to start gambling because you have a high multiplier. On this page I have explained the calculation and the settings. You should now know how it works.
Start now with leverage trading and a reliable broker:
Read my other articles about CFD Trading:
- 10 CFD Trading mistakes
- 7 important CFD Trading Tips & Tricks for beginners
- Advantages of CFD trading: Why you should start
- Bitcoin CFD Trading Tutorial
- CFD Broker deposit protection – How safe is your money?
- CFD Broker with negative balance protection & Margin Call
- CFD Brokers: Market Maker And DMA Broker In Comparison
- CFD Trading costs and fees
- CFD Trading Demo Account Comparison | Test for free
- CFD Trading indicators
- CFDs vs. Micro Futures – Which one is better?
- Criteria for a serious CFD Broker – Eliminate scam
- How does a CFD Broker really earn money?
- How to find a good CFD Broker
- Is CFD Trading legal? – avoid scams
- Learn CFD Trading – Basic tutorial for beginners
- My real CFD Trading experience that Can Make The Entry Easier
- The 10 best CFD Brokers
- The key figures of a successful CFD Trading Strategy
- What are Stock CFDs | Explanation & Tutorial
- What is CFD Trading Leverage | Explanation
- What is CFD Trading? – Ultimate Guide For A Profitable Start