Leverage Trading
Leverage trading allows investors to increase their position size and profit potential. In this guide, we look at definitions and examples spanning forex, stocks and cryptos. Out tutorial also explores the qualities that make a good leveraged trading broker.
Brokers With Leverage Trading for United States
Leveraged Trading Explained
Also known as margin trading, leverage is a popular way for forex, crypto and stock swing traders to maximize returns. Leverage essentially allows you to borrow money against the future price of an asset, reducing the amount of money required to open a position (the margin).
Leverage is usually expressed as a ratio or formula, like 1:2, 1:5, 1:10, 1:50 or even 1:100, but can also be seen as a multiplier like 2x, 5x, 10x, 50x or 100x. In practice, leverage of 1:10 (or 10x) means that if you invested $10, you could purchase $100 worth of securities. Importantly, it’s possible to use margin trading to go both long and short.
Since leveraged trading allows you to make big investments with relatively little capital, it can amplify profits—but it can also magnify losses. This makes it important to have a robust risk management strategy in place to limit potential losses, for example, using stop-loss orders.
Example
Let’s look at a simple example. You’re trading stocks and want to buy 100 shares at an individual price of $1.00. With zero leverage, you would need $100 to open this position. If the share price went up to $1.50, your shares would be worth $150 in total, and you would have made $50 in profit. Alternatively, if the share price decreased to $0.50, you would lose $50.
Now let’s say you can trade with leverage of 1:10, or 10x, meaning you can buy 1,000 shares with the same $100. If the share price goes up to $1.50 or down to $0.50, you have made or lost $500 profit (5 times the value of your initial investment).
If the math of margin trading still feels confusing, there are a number of profit, risk and liquidation calculators available online.
Limits
Because of the risks involved, some regulatory bodies have placed a ban on highly leveraged retail trades. In the EU and UK, for example, leverage on forex trades is capped at 1:30. We recommend researching the rules in your region before getting started.
Importantly, leverage trading isn’t illegal. However, beginners should use caution on volatile instruments like crypto CFDs. Fortunately, many top brokers and platforms limit the leverage available on cryptocurrencies to 1:2 or 2x.
As margin trading involves borrowing money, traders may also need to pay back interest in the form of trading fees. In swing trading, investors are often charged overnight fees for holding a long position after the market closes. Conversely, if traders go short, they can accrue interest from a broker.
Leveraged Trading Markets
Leverage trading can be used across a wide range of markets and instruments, including cryptos, forex, stocks, options and futures. The amount of leverage you can use depends on the broker’s regulatory status and the chosen asset. Crucially, the more unpredictable the market, the more careful you should be.
Crypto
Many leading brokers offer leverage on cryptocurrency trades. However, EU clients are restricted to 1:2 rates on digital currencies while USA traders are capped at 1:5. These limits can be avoided by trading through unregulated, overseas brokerages.
Traders can limit their potential losses by setting stop-loss orders. Take-profit orders (T/P) are also useful for exiting trades at the right time by allowing you to avoid unfavorable changes in market direction.
Common currencies used with leveraged crypto trading include Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Ripple (XRP) and various altcoins.
Top leveraged crypto trading brokers include Binance, Coinbase and Kraken.
Forex
Leveraged trading is common in forex markets. As before, margin is held as collateral by the broker. For instance, if a trader bought $1,000 of EUR/USD with a margin requirement of 1%, they would only need to invest $10, which is equivalent to a leverage ratio of 1:100 or 100x. More volatile currency pairs usually require more collateral, so they have smaller margin rates.
Note, forex trading tends to involve higher leverage than the stock market. However, currency prices usually change by less than 1% in a single day which reduces the potential risk.
Stocks
Stocks and shares are popular for swing trading. There are several also stock-based derivatives, like CFDs and ETFs, that can be used in leverage trading.
CFDs are simple financial contracts where the buyer must pay the seller the difference between the current price of an asset and its future price when the contract expires. Unlike traditional stock trading, CFDs don’t allow you to take ownership of the underlying asset.
CFDs usually involves taking on a relatively high amount of leverage. Trades often have small capital requirements, but can make for risky investments. They are banned in the US for retail clients, for example. However, if used successfully, they can lead to large profits.
ETFs are a type of security typically designed to measure a stock index performance, often consisting of a bundle of shares. Some ETFs use leverage by design. One example is the 3x S&P 500 ETF that aims to give 300% of the returns of the S&P 500 index.
Pros of Leverage Trading
Advantages of trading with leverage include:
- Profit margin – If used correctly, margin allows traders to make profits that exceed their initial investment
- Smaller capital requirements – As leverage trading lets you borrow against the future price of an asset, traders with relatively small amounts of capital can open substantial positions
- Risk management – Margin trading encouages you to develop careful risk management techniques and to utilise stop-loss orders and take profit limits
Cons of Leverage Trading
Downsides of trading on leverage include:
- Increased risk – Whilst returns are amplified, so too are losses. As a result, beginners should be careful when starting out
- Limited rates on markets – Due to market volatility, limited leverage is available to retail traders in crypto and forex markets, in particular
Rules & Regulations
There are various limits on the amount of leverage available to retail traders in key trading hubs:
EU & UK
- 1:30 for major currency pairs
- 1:20 for non-major currency pairs, gold and major indices
- 1:10 for commodities other than gold and non-major equity indices
- 1:5 for individual equities
- 1:2 for cryptos
US
- 1:50 on major currency pairs
- 1:5 for cryptos
- 1:4 on stocks
Australia
- 1:30 on major currency pairs
- 1:20 on minor currency pairs
- 1:5 on stocks
- 1:2 on cryptos
India
The Securities and Exchange Board of India (SEBI) recently announced that brokers can’t offer intraday leveraged products. As a result, day traders are restricted to spot trades. However, swing traders can still use leverage on longer trades, with rates varying among websites.
Choosing a Broker
Use our guide below to find the best leveraged trading brokers.
Rates
Almost all brokers offer leveraged trading on their platforms, though maximum rates vary.
Some providers offer multiple accounts to their clients with different rates available with each solution. Larger leverage ratios are usually accessed through high-capital accounts that require a significant minimum deposit.
Professional traders can also take on much higher rates, though they lose many of the legal protections given to retail clients like negative balance protection and investor insurance. Acquiring professional trader status may involve a formal interview process and evidence of your experience in the financial markets.
Note, brokers based in offshore territories with no regulatory supervision typically offer greater rates. However, retail traders should use these platforms with caution as they will receive limited legal protection.
Tip: Practise leveraged trading strategies on a demo account first. A paper trading account lets you test trades with virtual capital and many brokers offer these simulators free of charge.
Fees
Most online brokers offer affordable leverage trading to their clients. However, the fee structure can vary between platforms. Broadly, there are two categories of brokers: ECN and STP, though some providers offer both types of accounts.
STP (Straight Through Processing) brokers tend to take their fees through the spread – the difference between the bid and ask price. ECN brokers, in contrast, generally charge a flat fee per trade, which can be cheaper for active traders.
In swing trading, investors tend to hold positions for multiple days, which means that trading fees should also be considered alongside overnight charges, which are used to pay the interest acquired by taking on leverage. Fortunately, overnight fees should be clearly stated on the broker’s website. It’s also worth noting that some markets like crypto exchanges never close, meaning that some brands don’t charge overnight fees.
Other costs to watch out for include deposit and withdrawal fees, though these are often waived at the top brokers.
Reputation
It’s important to choose a trustworthy and reliable broker. So always do your research before registering with a new platform. Things to check include:
- Regulation: Leveraged trading brokers regulated by top-tier financial organizations, like the CySEC, ASIC, FCA, CTFC, SEC, or FINRA, are subject to strict operating rules. Investing money with an unregulated or offshore broker increases the risk of scams.
- Risk Disclosures: Leverage trading is by no means a get-rich-quick scheme, and brokers should adequately disclose the risks involved on their website, including win rates on CFDs.
- Bonuses & Promotions: Some fraudsters use attractive bonuses to entice new customers to their platform. But if an offer seems too good to be true, it probably is.
- Negative Balance Protection: Good brokers will offer retail clients negative balance protection, which prevents you from losing more than your account balance. This is particularly useful when trading on leverage.
- Trading History: One of our top tips is to look for platforms with a long and established history as they are usually more trustworthy.
- Training: The best brokers offer 101 training materials on the basics of margin trading and also explain why it can be dangerous and can lead to debts. In addition, tutorials can explain if leverage trading is taxable in your jurisdiction and how does it work.
Final Thoughts
For dummies, leveraged trading essentially helps investors open large positions with a relatively small margin. This can lead to greater profits, but also increases the size of potential losses. As a result, always approach margin trading with caution and sign up with a regulated broker.
FAQ
Is Forex Trading Leverage Halal Or Haram In Islam?
Many brokers offer Islamic swap-free accounts to Muslim traders. These solutions let you trade without paying or accruing interest. For the final word on the religious ethics of leveraged trading, consult a qualified spiritual authority.
Is Leverage Trading Gambling?
No, leverage trading is not gambling. Many professional traders use leverage to increase their market exposure. For retail traders, it’s important to utilise risk management alerts and limits.
Can I Practice Leverage Trading Long Term?
Yes, leverage can be used on both long-term and short-term trades. Many swing traders hold leveraged positions over multiple days and weeks.
Are There Fees Involved In Leverage Trading?
Since leverage involves taking a loan from the broker, traders often have to pay interest in the form of overnight fees. Standard trading fees also apply to leveraged trades.
What Is A Leverage Trading Ratio?
The leverage ratio expresses the total value of the trade relative to the amount of margin required to execute it. For example, a 1:10 ratio means that you can open a $1,000 position using only $100 in capital.