What is leverage?

What is leverage?

Leverage in trading is a system by which traders can enter much larger positions than what they could open with their capital. It means traders only need a percentage of the position they will open, which we call “cash needed” at Skilling. Although this makes leverage appealing to investors, it also has a high risk.

The exposure it provides also affects the exposure to losses, which is why it is so important to understand leverage in trading, how it works, and the importance of risk management. Trading leverage varies across brokers, platforms, and instruments.

ASSET CLASS	MIN. LEVERAGE	MAX. LEVERAGE	MARGIN REQUIREMENT
Forex	1:1	1:30	3.3%
Commodities	1:1	1:10	10%
Indices	1:1	1:20	5%
Stocks	1:1	1:5	20%
Cryptos	1:1	1:2	50%

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How does leverage work?

Consider two investors that want to trade $30,000 worth of the EUR/USD currency pair.
The values in the examples below are in USD. Consider the investor trading CFDs with a leverage ratio of 30:1.

To calculate the margin required, we use the formula:

In this case:

$30,000

$1,000

This means the investor trading CFDs only needs to deposit $1,000 as a margin to open the same $30,000 position.
Now, let's assume the EUR/USD exchange rate moves, resulting in a $1,500 change in position value:

Example 1

In this example, the investor trading
EUR/USD without leverage
pays the full value of the position of $30,000:

PROFIT/LOSS:
$1,500

Return on Investment* = 5%

( $1,500 ÷ $30,000 * 100 )

*Achieved 5% return on initial margin used

Example 2

For the Investor trading CFD
on EUR/USD with leverage of 30:1:

PROFIT/LOSS:
$1,500
( Same as unleveraged )

Return on Investment* = 150%

( $1,500 ÷ $1,000 * 100 )

*Achieved 150% return on initial margin used

The examples demonstrate how leverage can magnify both profits and losses. It is crucial to note that if the market had moved in the opposite direction, Investors trading CFDs would have experienced a proportionally more significant loss on their initial investment.

Trade on both rising and falling markets

Open short or long positions according to the market conditions and your trading strategy.

Leveraged trading

You need significantly less capital to open a trade than you do to own the underlying asset. Leverage can significantly increase your gains and losses.

Regulated environment

Trading with Skilling ensures a regulated environment, segregation of all client deposits, and client-focused customer support.

Fast execution

Ultrafast order execution of 8 milliseconds on average on FX. No dealing desk intervention. Your order gets routed automatically to one or several of our liquidity providers, ensuring your trade is always matched and filled quickly and efficiently.

High exposure
to the market

Margins are the capital needed to enter a trade. With small percentages, traders have higher exposure to the underlying asset.

24/5
market

Although this depends on the markets/instruments, key markets are available to trade 24 hours a day, five times a week, except cryptos, which can be traded all week.

Mitigate against
low volatility

This is especially key for forex trading. When market volatility is low, leverage trading increases the exposure. With a higher exposure, even small movements can greatly impact returns and/or losses.

Importance of risk management in trading with leverage

Before opening a trading position, it’s very important to consider the cash needed but also the maximum loss we are willing to take, or the target we’d like to achieve. Stop loss and limit orders allow traders to set a specific price at which an instruction to buy or sell will be triggered.

But these are not the only elements affecting risk management. Equally important is planning your trades before getting started and after carrying out in-depth analysis (whether it’s technical/fundamental or a combination of the two).

Also key is calculating the expected return to set goals or diversifying and hedging your portfolio

Leverage trading can provide traders with the opportunity to make high returns without the need to own a large amount of capital, but also it can turn into big losses and hence the importance of risk management and trading education.

What is leverage?

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What is leverage?

For Retail Clients leverage information