67.90 % of retail investors lose their capital when trading CFDs with this provider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67.90 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Trading with financial leverage

Leverage is a trading tool that allows traders to open trading positions of much higher volume. In simple terms, and with a bit of exaggeration, it is a kind of borrowing of funds that starts when a trading position is opened and ends when it is closed.

Unlike loans, which are a pretty straightforward concept, there is no need for ongoing repayment and no ramping up of interest with leverage. Leverage only involves the payment of so-called swaps (overnight holding fees), which are not necessarily a cost but can also be an additional profit for traders (depending on whether the swap charged is positive or negative). However, if you do not plan to keep your trading position open overnight, you do not need to bother with swaps at all.
 

Size of financial leverage

The size of the leverage directly affects the maximum size of the position that the trader can open. For example, if a trader is given a leverage ratio of 1:30, then this means that with this ratio the trader can open a trading position with a volume 30 times higher than the amount he is investing.

As an EU regulated broker, Purple Trading can offer a maximum leverage of 1:30 for retail clients.

Financial leverage example:

A professional trader is about to open a position in which he is willing to invest $1000. He uses the 1:500 leverage in his professional account (Based on CySEC and ESMA regulations, this leverage is not available to an ordinary retail client, but can be used by professional clients). Thus, thanks to the leverage, a trader with USD 1,000 can open a position of up to 500 times the size of his deposit (i.e. USD 500,000). If a trader decided not to use the leverage, he could only open a position of the size of his deposit, in this case USD 1,000.

financial leverage

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Other possible types of leverage

Technical financial leverage

This is the maximum leverage available (e.g. 1:30) in the event that position(s) of the maximum possible volume are opened.

 

Real leverage

The leverage that a trader uses in real terms when his financial account is not 100% encumbered by open trades. This means that if a trader has, for example, only one position "EURUSD" with a volume of 0.01lot (1000USD) open in a dollar trading account, then the size of the real leverage is 1:1.

 

Advantages and disadvantages of financial leverage

Leverage has its pros and cons and can pose a significant risk, especially for beginner traders, if used incorrectly.

Advantages

In the case of positive swaps, the additional gain from holding the position overnight, possibility to open larger positions, achieving potentially higher profits.

Disadvantages

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.

  • Can I test the leverage on a demo account?

    Yes, the Purple Trading demo account offers the possibility to try out leverage, either in ESMA regulated leverage mode (max. 1:30) or as any leverage identical to the settings for professional clients (up to 1:500).

  • 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

67.90 % of retail investors lose their capital when trading CFDs with this provider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67.90 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.