What is Leverage in Trading? Leverage Meaning and how to Find a High Leverage Broker

What is Leverage in Trading? Leverage Meaning and how to Find a High Leverage Broker

Leverage Trading, If you’re armed with the required skills and knowledge to succeed in the online trading arena, and you have a higher appetite for risk – did you know that most platforms now allow you to trade on leverage?

In its most basic form, leverage allows you to trade with more money than you have in your account.

On the one hand, this allows you to amplify your gains in the event of a profitable trade. However, trading on leverage is also fraught with risk. In fact, you could have your entire margin liquidated.

As such, we would suggest reading our comprehensive guide on What is Leverage in Trading? Within it, we’ll uncover the ins and outs of how to leverage trading works, who is eligible, how much you’ll be able to apply, the underlying risks, and more.

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    LongHornFX – Best Forex Trading Platform

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    • UK traders our chosen broker is Alvexo
    • Super-low commissions and tight spreads
    • Trade forex, crypto, commodities, and indices
    • Fully supported by MetaTrader 4

     

     

    Note: Leverage limits in the UK are determined by EMSA – a European body created to protect retail investors. You’ll only be able to surpass these limits if you’re a professional trader.

    What is Leverage Trading? Leverage Meaning and Definition

    In a nutshell, trading on leverage allows you to invest more than you have in your brokerage account. In doing so, you are effectively borrowing funds from the broker in question.

    In return, the broker will charge you interest on the borrowed funds, which is known as ‘overnight financing’. As the name suggests, this is charged on a daily basis for as long as your leveraged trades remain open.

    Leverage allows you to boost your trade sizes by a pre-defined factor. For example, let’s say that you wanted to add leverage to trade on gold. Orindailly, you would only be able to place an order to an amount equal or less than your account balance.

    However, by applying leverage of 3:1, you can trade to an amount three times larger. This means that a £300 balance would permit the trade of £900 on gold. On the flip side, leverage is a high risk, as you could have your entire ‘margin’ liquidated if the trade goes against you.

    Let’s look at an example of how a leveraged trade would work in practice.

    Leverage Trading Example

    Let’s say that you want to trade the FTSE 100. Upon analyzing the charts, you’re confident that the FTSE 100 is likely to increase in price over the next 24 hours. As such, you decide to add leverage of 5:1 on your trade.

    1. You have £500 in your trading account
    2. You apply the leverage of 10:1, meaning that your trade is worth £5,000
    3. Later that day, the price of the FTSE 100 increases by 3% 
    4. Ordinally, your £500 order would have yielded £15 in profit (£500 x 3%)
    5. However, as you applied leverage of 10:1, your profit stands at £150 (£15 x 10)

    As you can see from the above example, applying leverage can amplify your gains when the trade goes in your favor. However – and as we cover in the next section, leverage can also amplify your losses.

    What are the Pros and Cons of Leverage Trading?

    The Pros

    • Trade with more than what you have in your broker account
    • ESMA limits allow you to trade up to 30:1 on major forex pairs
    • Amplify your gains when trades are successful
    • Available to both retail and institutional clients
    • Most brokers offer negative-balance protection

    The Cons

    • Leveraged trading is a high risk

    Risks of Leverage Trading – The Margin

    If applying leverage was risk-free, we would all be doing it. In other words, why trade with just £500 when we can boost our trades by up to 30:1? The simple answer to this is the margin.

    You see, in order to obtain leverage from an online broker, the platform will ask you to put up a margin, which essentially operates as a security deposit.

    Note: Your chosen broker will always state the trigger price in which your trade will be liquidated. This is the price that your trade will be closed automatically.

    The amount of margin that you will be required to put up as security correlates to the size of your trade, and the amount of margin you wish to apply.

    For example, let’s say that you wanted to trade £10,000 at leverage levels of 10:1. This means that your margin would need to be £1,000 (£10,000 / 10). Similarly, a £20,000 trade at 5:1 would require £4,000 in the margin (£20,000 / 5).

    Losing Your Margin

    Once the margin has been applied to your leveraged trade, you stand the risk of losing it in the event that your position goes against you. This is known as having your order ‘liquidated’, meaning that the broker will close your trade automatically and keep the margin.

    So how do we know when our trade is likely to be liquidated? Well, although the figures will vary from broker-to-broker, there’s a simple way to work this out. If you applied leverage at levels of 10:1, your trade would be liquidated if the order lost 10% in value (1/10).

    Similarly, a trade at leverage levels of 4:1 would be liquidated if the trade lost  25% in value (1/4).

    How to Avoid Liquidation?

    In order to avoid having your trade liquidated, there are two options available to you. You can either close your trade and take a loss or alternatively, increase the size of your margin.

    🥇 Close Your Trade

    The easy option is to simply close your trade before it reaches the point of liquidation. Although you will still lose money, you could lose substantially less than leaving your trade open and allowing it liquidate.  For example, let’s say that you’re trading at a leverage of 10:1, with a margin of £200.

    To clarify, if your trade goes down by more than 10%, you’ll lose your £200 margin. With that said, later in the day, your trade has decreased by 5% in value. If you closed the trade, you would lose £100, which is 50% of your margin (5% x 10:1).

    Although you still lost £100, a few hours later the asset decreased by a further 5%, meaning that the 10% liquidation point was triggered. Had you held on and hoped for the best, you would have lost your entire margin – which is £200.

    🥇 Add More Margin

    The second option available to you is to add more margin. Some brokers will send you a notification when you are approaching the liquidation point, asking you whether or not you would like to increase your margin size. If you do, this will keep the trade open and effectively give you more breathing space.

    This option is slightly more complex than simply closing your trade automatically, so we’ve outlined a quick example below.

    Example of Increasing Your Margin Position

    Let’s say that you are trading Apple stocks on margin, at leverage levels of 4:1. Your margin is £500, so you’re trading at £2,000 in the open marketplace. You purchased your Apple stocks at a price of £180 per share. This means that you will be liquidated if the price of Apple goes down to £135 (£180 – 25%)

    1. Apple released its quarterly results, which are less favorable than the markets had hoped for.
    2. As such, the price of Apple goes down by 24% over the course of the next few weeks.
    3. If the price goes down by an additional 1%, you will be liquidated. 
    4. As such, you decide to add a further £500 in the margin. 
    5. This means that at the current price of £136.8, you will afford yourself an additional 25% safety net.
    6. As such, the only way that you would be liquidated is if the price of Apple goes down to £102.6

    The above example of increasing your margin position will leave us with two possibilities. If the price of Apple eventually recovers beyond your original trade size of £180 per share, you’ll not only be in profit, but your gains will be amplified by the leverage of 4:1.

    On the other hand, if the price of Apple continued to tank, and it breached the £102.6 liquidation point, you would lose all of your margins and both trades would be closed. This would amount to £1,000, as you put up two margin securities of £500 each.

    How Much Leverage can I Trade With?

    The amount of leverage that you are able to get when trading online will depend on a number of variables. This includes the type of asset you are looking to trade, whether you’re a retail or institutional client, your location, and the broker itself.

    Crucially, if you’re a retail trader that is based in the UK, then the broker will need to comply with the regulations outlined by the European Securities and Markets Authority (ESMA). In a nutshell, these regulations stipulate how much leverage you can trade at if you’re a retail client.

    Below we have listed the leverage limits as per ESMA.

    ✔️ 30:1 for major forex pairs

    ✔️ 20:1 for non-major forex pairs, gold, and major indices

     ✔️ 10:1 for commodities other than gold and non-major equity indices

    ✔️ 5:1 for individual stocks

    ✔️ 2:1 for cryptocurrencies

    With that being said, the above limits will not apply if you are a professional trader.

    Higher Leverage Limits for Professional Trader Accounts

    In order to open a professional trading account with your chosen broker, you will need to meet at least two of the following three criteria.

    ✔️ You have opened and closed at least 10 trades in each of the previous four quarters. Each trade must have been worth at least €150.

    ✔️ Your financial portfolio is worth €500,000 or more

    ✔️ You have at least one years’ worth of experience in a relevant financial field (such as working for a stockbroker or investment bank).

    As you can see from the above, the requirement is 3 is somewhat subjective. As such, the broker will need to review each and every application when deciding whether or not you approve of you as a professional trader. Moreover, you’ll need to provide supporting documentation.

    Nevertheless, if you do meet the above requirements, you will benefit from much higher leverage limits. In fact, this can be as high as 500:1 on major forex pairs, and 100:1 on major indices such as the S&P 500.

    How do I get Leverage on my Trades?

    In the vast majority of cases, your chosen broker will allow you to apply leverage to your trades as soon as you open the account. However, this will be on the proviso that you demonstrate to the broker that you have a firm grasp of the underlying risks.

    In other words, you will be required to answer some basic multiple-choice questions when you go through the registration process. These will center on the risks of applying leverage to your trade. If you answer the questions successfully, your margin capabilities will be activated automatically.

    How to Find a High Leverage Broker?

    If you’re keen to start trading on margin, you’ll need to find a broker that not only allows you to apply leverage but leverage on your preferred asset class. With that said, most brokers allow you to apply leverage on both forex and CFDs, meaning that you’ll have access to thousands of financial instruments.

    Nevertheless, we have listed our top 3 leverage broker picks below. Just make sure that you perform some additional research on the broker prior to signing up.

    1. Skilling – Best All-Round Trading Platform of 2020

    Launched in 2019, Skilling has emerged to become one of the best trading platforms in the industry. The provider is regulated by CySEC and strictly confirms to their stringent codes of practice. Skilling focuses on forex, along with other financial instruments such as stocks, indices, and commodities.

    Both the trading platform and app have simple features, making it suitable for beginners and professionals. If you are new to trading, the Skilling Trade Assistant can help you with resources and guides.

    With over 800 different instruments, Skilling allows you to speculate with a low initial investment of just $100. The signup process is simple, fast, and straightforward.

    L2T Rating

    • Trade with leverage
    • Super-competitive fees
    • Heaps of supported payment methods
    • Relatively new in the brokerage scene
    75% of retail investors lose money when trading CFDs with this provider

    2. Capital.com – Zero Commissions and Ultra-Low Spreads

    Capital.com is an FCA-regulated online broker that offers heaps of financial instruments. All in the form of CFDs - this covers stocks, indices, commodities, and even cryptocurrencies. You will not pay a single penny in commission, and spreads are super-tight. Leverage facilities are also on offer - fully in-line with ESMA limits.

    Once again, this stands at 1:30 on majors and 1:20 on minors and exotics. If you are based outside of Europe or you are deemed to be a professional client, you will get even higher limits. Getting money into Capital.com is also a breeze - as the platform supports debit/credit cards, e-wallets, and bank account transfers. Best of all, you can get started with just 20 £/$.

    Our Rating

    • Zero commissions on all assets
    • Super-tight spreads
    • FCA regulated
    82.61% of retail investors lose money when trading CFDs with this provider

    3. eToro – Best Forex Broker for Beginners

    eToro makes our number one spot because the platform is tailored to those with little experience in the forex trading space. Firstly, the registration process takes less than 5 minutes, and you can deposit funds with a debit/credit card, e-wallet, or bank account. Next, the broker does not charge any commissions, so you only need to worry about the spread.

    Crucially, the trading platform is super-easy to use, and you can even engage in 'Copy Trading'. This is where you copy the buy and sell orders of experienced forex traders who are registered at eToro. You get to choose how much you wish to stake when copying traders, so you have the chance the make gains without needing to lift a finger.

    The forex department itself lists heaps of currency pairs across the majors, minors, and exotics. Although eToro is a bit short in the technical indicator department, the platform does allow you to apply leverage. This is capped at 30:1 on majors and 20:1 on minors/exotics - as per ESMA regulations.

    Our Rating

    • Supports multiple payment methods including e-wallets
    • No trading fees other than the spread
    • Fast registration and KYC process
    • Spreads can be high on less liquid forex pairs
    75% of retail investors lose money when trading CFDs with this provider

    4. AVATrade – 2 x $200 Forex Welcome Bonuses

    The team at AVATrade are now offering a huge 20% forex bonus of up to $10,000. This means that you will need to deposit $50,000 to get the maximum bonus allocation. Take note, you'll need to deposit a minimum of $100 to get the bonus, and your account needs to be verified before the funds are credited. In terms of withdrawing the bonus out, you'll get $1 for every 0.1 lot that you trade.

    Our Rating

    • 20% welcome bonus of upto $10,000
    • Minimum deposit $100
    • Verify your account before the bonus is credited
    75% of retail investors lose money when trading CFDs with this provider

    5. EuropeFX – Great Fees and Several FX Trading Platforms

    As the name suggests, EuropeFX is a specialist forex broker. With that said, the platform also supports CFDs in the form of shares, indices, cryptocurrencies, and commodities. You will be able to trade via MT4, so you can choose from desktop software, or a mobile/tablet application. If you want to trade via your standard web browser, the broker also offers its own native platform - EuroTrader 2.0. In terms of fees, EuropeFX offers super-tight spreads on major pairs. Your money is safe at all times, not least because the broker is authorized and licensed by CySEC.

    Our Rating

    • MT4 and native trading platforms
    • Super-low spreads
    • Great reputation and licensed by CySEC
    • Premium account has a minimum deposit of 1,000 EUR

    82.61% of retail investors lose money when trading CFDs with this provider

    Conclusion

    In summary, applying leverage can be a highly effective trading strategy when utilized correctly. As such, you stand the chance of amplifying your profits when you are confident on a particular trading opportunity.

    With that being said, leverage trading is also high risk. If a trade goes in the opposite direction of what you had hoped for, you could lose your entire margin.

    Ultimately, if you do decide to trade with leverage, you need to ensure that you have a firm understanding of the underlying risks. Moreover, you need to ensure that you install sensible stop-losses to protect your position from liquidation.

    LongHornFX – Best Forex Trading Platform

    Our Rating

    • UK traders our chosen broker is Alvexo
    • Super-low commissions and tight spreads
    • Trade forex, crypto, commodities, and indices
    • Fully supported by MetaTrader 4

     

    FAQs

    What is a high leverage broker?

    As the name suggests, a high leverage broker is an online trading platform that offers high leverage limits. However,brokers can no longer choose how much leverage they offer to clients of the platform per-say, as the limits are determined by ESMA.

    How much leverage will I get with a UK broker?

    The specific limits will depend on the asset class that you wish to trade. As per ESMA - major forex pairs are capped at 30:1 for retail traders. At the lower end of these limits, cryptocurrencies are capped at 2:1.

    How do I get higher leverage limits?

    If you are looking to trade at higher leverage limits, you will need to open a professional trader account. In order to be eligible, you will need to meet certain criteria, such as having a financial portfolio of €500,000 or more, and at least one year experience in a financial field.

    Can I short assets on leverage?

    If leverage is available on your chosen asset class, you will always have the option of going both long and short on your trades.

    How do I know when I am going to be liquidated?

    Trading platforms will always let you know the exact liquidation trigger price. As a ballpark figure, this is usually calculated by converting the leverage factor as a percentage. For example, leverage of 10:1 and 5:1 would have a liquidation point of 10% and 20%, respectively.

    What are leverage fees?

    When you apply leverage on your trades, you are effectively borrowing the money from your chosen broker. As such, you'll be charged an overnight funding rate.

    What is the max leverage on stocks and shares?

    If you're looking to apply leverage on stocks and shares, you'll need to do this via a CFD. Nevertheless, the max leverage limits on stock CFDs is 5:1.

    Author : Kane Peppi

    Kane Peppi

    Kane Pepi is a British researcher and writer that specializes in finance, financial crime, and blockchain technology. Now based in Malta, Kane writes for a number of platforms in the online domain. In particular, Kane is skilled at explaining complex financial subjects in a user-friendly manner. Academically, Kane holds a Bachelor’s Degree in Finance, a Master’s Degree in Financial Crime, and he is currently engaged in a Doctorate Degree researching the money laundering threats of the blockchain economy. Kane is also behind peer-reviewed publications - which includes an in-depth study into the relationship between money laundering and UK bookmakers. You will also find Kane’s material at websites such as MoneyCheck, the Motley Fool, InsideBitcoins, Blockonomi, Learnbonds, and the Malta Association of Compliance Officers.