Trading with financial leverage
Leverage or financial leverage is a trading tool that allows users to open trading positions of much higher volume than when trading without it. In simplicity and with a bit of exaggeration, it is a kind of a financial loan, which begins with the opening of a trading position and ends with the moment of its closing.
However, unlike loans, which we all know well, there is no ongoing repayment or accruing of interest. With leverage, you only pay so-called swaps (overnight holding fees), which may not always be an expense but may also be an additional gain for traders (depending on whether the swap charged is positive or negative).
The size of the leverage directly affects the maximum size of the position that the trader can open. For example, if a trader is provided with a 1: 30 leverage, then he can open a trading position 30 times higher than the number of active volumes of funds in the trading account.
The professional trader has $ 1,000 deposited in his trading account and operates a 1: 500 financial leverage within his account (This leverage is not available to Retail clients as per ESMA and CySEC guidelines, however,professional clients can use it). With this amount of financial leverage he can eventually use his 1000USD to open a position up to 500 times higher, ie 500 * 1000USD = 500 000USD. Without financial leverage, he could open a trading position of the size of his deposit only, ie the volume of 1000 USD.
Technical vs. real financial leverage
Technical – this is the maximum usable financial leverage (for example 1: 30) in case the position(s) with the maximum possible volume is opened.
Real – financial leverage that a trader actually uses when his financial account is not 100% encumbered by open trades. This means that if, for example, a trader has only one "EURUSD" position open in a dollar trading account with a volume of 0.01 lots (1000 USD), then the size of the real leverage is 1: 1.
- In the case of positive swaps, the additional gain from holding the position overnight,
- possibility to open larger positions,
- achieving potentially higher profits.
- In the case of negative swaps, the additional cost of holding the position overnight,
- Increasing the risk of recording losses,
- Resetting the trading account.
A few important questions and answers at the end
- Is it possible to eventually owe when trading leverage?
No. Under new European regulations, it is not possible for retail client accounts to have negative balance, which means that, in the event of unfavorable market conditions, brokerage firms must ensure that trading positions are closed before the trading account reaches a negative value (in the event that the account gets into negative, then the trader is not obliged to compensate for this negative balance).
- Is it better to trade with or without leverage?
Trading with leverage brings with it both benefits in the form of potentially higher appreciation and/or the risk of possible higher losses. It is therefore not clear whether it is more advantageous to trade with or without financial leverage.
- If I have a trading account with a leverage of 1: 30, then does this amount of leverage apply to all instruments?
No, it doesn't have to be that way. It is always necessary to be well acquainted with the business conditions of the brokerage company, as it can provide different amounts of financial leverage on different instruments within its offer. See the leverage conditions for Purple Trading