Trading conceptsUpdated 2 min readBy the FXNOD team
What is leverage in trading?
Leverage lets you control a position much larger than your deposit. With 1:100 leverage, 100 of your money controls 10,000 of a market. Profits and losses are calculated on the full position, so both are magnified equally. Leverage does not change the odds of a trade. It changes how much a small move costs you.
A worked example
| Leverage | Deposit used | Position controlled | Result of a 1% move against you |
|---|---|---|---|
| 1:1 | 1,000 | 1,000 | Lose 10 (1% of the deposit) |
| 1:10 | 1,000 | 10,000 | Lose 100 (10%) |
| 1:100 | 1,000 | 100,000 | Lose 1,000 (100%) |
| 1:500 | 1,000 | 500,000 | Lost at a move of 0.2% |
The move that wipes out the deposit is one divided by the leverage used. At 1:100 it is 1%. Markets move that far routinely.
Available leverage and used leverage
The leverage a broker offers is a ceiling, not an instruction. What matters is the leverage you actually use: the size of your position divided by your account balance. A trader with 1:1000 available who opens a position twice the size of the account is using 2:1. Decide position size from your risk rule and ignore the maximum.
Why brokers offer so much
- It lets small accounts trade, which brings in clients.
- Larger positions mean more spread and commission.
- Strongly regulated markets cap retail leverage because of the losses it causes.
Using it safely
Fix the money at risk per trade
For example 1% of the account.
Place the stop where the trade is wrong
From the chart.
Calculate the position from those two
Risk divided by stop distance.
Check the leverage that implies
If it is high, the stop is too close or the risk too large.
Leverage on options and multipliers
A fixed-payout option has no leverage in this sense: the stake is the whole risk. A multiplier magnifies moves like leverage and caps the loss at the stake. Deriv says leverage on CFDs can be very high on selected instruments, and warns that CFDs carry a high risk of losing money rapidly because of it.
Questions people ask
- Is high leverage good or bad?
- Available leverage is neutral. Used leverage is what causes losses, and beginners use far too much.
- What leverage should a beginner use?
- As little as possible. Size positions from a 1% risk rule and the leverage will take care of itself.
- Can I lose more than my deposit with leverage?
- It depends on the broker and product. Some offer negative balance protection. Check your account's terms.
Try it without risking money
Connect your Deriv demo account to FXNOD and place the trade you just read about with virtual funds. Check the available tool packages in Discover.
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