CFD leveraged trading
Leveraged trading is very popular when trading with CFDs, as it enables multiplying of the traded volume. When using leverage, you trade with your capital as well as capital borrowed from a broker. It’s important to bear in mind that leverage trading multiplies both profit and loss. Even when capital markets seem stable, leveraged trading can cause high gain or significant loss very quickly.
The maximum leverage ratio
According to current regulations in membering countries of the European Union, any broker can offer the maximum leverage for trading in the ratio of 30:1, while the ratio differs among each instruments. Moreover, the broker must undertake steps to prevent a negative balance on your account. The aim of ESMA is to protect the public interest by contributing to the stability and efficiency of the financial system. Outside of Europe, brokers may offer the leverage ratio of up to 100:1, while 5000:1 ratio was no exception in the past.
When a client buys 1 lot of EUR/USD currency pair without leverage, they pay 10 000 x currency pair; for example 100 000 x 1,1 = 11 000 USD. By using leverage trading 1:10, they would pay 100 000 x exchange rate / leverage effect for 1 lot, for example: 10 000 x 1,1 / 20 = 550 USD.
In a relation to leveraged trading, the term hedging is often used. Hedging is used to minimize and remove risks of trading positions via trading operations with derivatives. Hedging serves and security against the risk of adverse price movements (exchange rate) of the asset.
Hedging may remove the risk of price movement to your detriment. There are many forms of hedging. Investors often use the strategy of opening the opposite trading position than the one present on the market.
A client has got an open position on oil. After some time, an unexpected political or economic situation happens, which could affect oil production and supply, and what could lead to significant price growth. When the trader opens the opposite trading position (that is long position) and oil price really does grow, the previous position incurs loss, while the opposite position grows.
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