Beginners Guide to Leverage Trading | Learn to Trade | OANDA (2024)

LearnDifference between leveraged and other forms of financial trading.

Leverage trading is the use of a smaller amount of initial funds or capital to gain exposure to larger trade positions in an underlying asset or financial instrument.

Beginners Guide to Leverage Trading | Learn to Trade | OANDA (1)

Learn trading basics

In this article you will learn:

  • What is leverage trading?
  • What are maximum leverage ratios?
  • The history of trading with leverage

What is leverage trading?

Leverage trading is the use of a smaller amount of initial funds or capital to gain exposure to larger trade positions in an underlying asset or financial instrument. Financial instruments include forex (currency), commodities and indices. You can access these instruments through different brokers.

As a trader, you are looking to make a profit on the difference between the open price and closing price of your trade.

Without leverage, assuming you wanted to invest US$100 into buying EUR/USD, if the price moved in your favor by 1%, you would hold US$101. Similarly, if the price decreased by 1%, you would hold US$99.

How does leverage trading work?

Beginners Guide to Leverage Trading | Learn to Trade | OANDA (3)Asset classes available for trading with leverage varies between regulatory jurisdictions

Leverage allows you to use a smaller amount of initial funds or capital to gain exposure to larger trade positions in an underlying asset or financial instrument. When you open a live account with OANDA, for every trade you place with leverage, you are able to gain increased exposure to an underlying asset or financial instrument that is of interest to you. Put simply, leverage effectively amplifies the amount of money you are putting down to trade with.

For example, if you decide to use leverage when trading stocks or shares, you can buy an increased amount of shares. So, with a leverage of 10:1, your money is amplified 10 times, if it is 30:1, then your exposure is amplified by 30 times, and so on. The use of leverage can also be applied to other types of financial instruments, such as cryptocurrency, forex and indices. However, the flip side of trading with leverage is that, if the trade goes against you, your losses will be amplified as well. In other words, greater exposure leads to bigger ups and bigger downs, and you can potentially lose more than you invest.

Leverage ratios

Regulators across the globe set maximum leverage limits to help retail traders avoid excess risk. At OANDA, we publish current leverage rates on our website.

The history of leverage

The current use of the word leverage in the financial context can be traced back to 1933.

Leveraged trading is often associated with new technologies such as the internet and mobile trading platforms, but trading with leverage has been around for quite some time. This type of trading has been common in the United States since the early 20th century. At that time, the requirements around trading were not so defined and the market was not regulated.

Consequently, extremely high leverage ratios were often allowed. As much as this might have helped some to achieve great profits, plenty of traders often received margin calls ﹣ an alert notification telling traders that their account balance had gone below the amount needed to keep their positions open﹣causing heavy losses.

Over time, leveraged trading became more and more regulated as regulators around the globe started enforcing measures to protect customers, especially retail clients. Regulators have introduced margin requirements and maximum leverage limits in their jurisdictions and require brokers to provide risk disclosures to customers so that customers are informed about the risk that trading with leverage carries.

Key takeaways

  • Leverage trading isn’t new. It has been in existence for a century.
  • Trading with leverage carries risk and can lead to big wins as well as big losses.
  • In recent years, regulators across the globe have been taking action to minimize risk for retail customers by introducing maximum leverage ratios, as well as enforcing specific risk management measures.
  • Different markets, asset classes and financial products can be traded with leverage.

Frequently asked questions (FAQ)

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Is leverage trading risky?

Yes, trading on leverage carries a high degree of risk. You may sustain a total loss of the initial funds and any additional funds deposited to maintain your position. If the market moves against your position, you may be called upon to pay substantial additional funds on short notice in order to maintain your position. If you fail to comply with a request for additional funds within the specified time, your position may be liquidated at a loss and you will be liable for any resulting deficit in your account.

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What happens when trading with leverage?

Leverage is a trading mechanism which can be used to increase the exposure to an asset class or financial instrument by allowing you to open larger positions than the actual capital you have placed into the trade position. The amount of capital you have to put into a trade depends on the leverage ratio for the specific financial instruments traded. The remaining part of the amount is effectively temporarily ‘covered’ by the broker.

When the price moves, the same amount of leverage is then used to determine the profit or loss. A relatively small market movement will have a disproportionately larger impact on the funds you have deposited or will have to deposit; this may work against you as well as for you.

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Does leverage affect the size of a trade?

Leverage itself does not have an effect on trade size, however, the higher the leverage, the larger the exposure to the underlying asset. In other words, with higher leverage you can buy or sell more units (lots) of the instrument you wish to trade and use less margin in order to place the trade. The size of the position determines the notional value of the trade or the exposure you have in the underlying asset or financial instrument.

In order to trade effectively with leverage, you need good trading education. Our webinars, workshops and how-to videos can help you learn the basics of leverage trading for free. Once you’ve opened a live or demo account, you can start implementing some of the trading strategies covered in our learn section.

Forex trading is high risk. Losses may exceed deposits.

OANDA CORPORATION IS A MEMBER OF NFA AND IS SUBJECT TO NFA'S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS.

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Beginners Guide to Leverage Trading | Learn to Trade | OANDA (2024)

FAQs

What is a good leverage for a beginner trader? ›

Leverage is solely a trader's choice. Most professional traders use the 1:100 ratio as a balance between trading risk and buying power. What is the best leverage level for a beginner? If you are a novice trader and are just starting to trade on the exchange, try using a low leverage first (1:10 or 1:20).

How do I start trading with leverage? ›

To start trading on leverage, it is advisable that a trader starts with a leverage that is lower than their maximum leverage allowance. This enables traders to keep their positions open for the full size, even if they are experiencing negative returns.

How do you understand trading with leverage? ›

Leverage trading is the use of a smaller amount of initial funds or capital to gain exposure to larger trade positions in an underlying asset or financial instrument. Financial instruments include forex (currency), commodities and indices. You can access these instruments through different brokers.

What leverage is good for $10? ›

Here's a general guideline for determining optimal leverage based on account size: Account Size: $10 - $50 Recommended Leverage: 1:100 or lower. Account Size: $100 - $200 Recommended Leverage: 1:200 or lower. Account Size: $200+ Recommended Leverage: 1:300 - 1:500 (for experienced traders)

Can you leverage trade with $100? ›

Leverage is a financial tool that allows you to control a larger position with a smaller initial investment. This is achieved by borrowing money from your broker to margin your trade. For example, with a leverage ratio of 1:100, you can control a $10,000 position with only $100 in your account.

Is 1/500 leverage good for a beginner? ›

A leverage ratio of 1:500 offers significant amplification of your trading position. With this level of leverage, a small investment can control positions that are 500 times larger. While the potential for profit is substantial, it's crucial to exercise caution and have a robust trading strategy in place.

What leverage do most traders use? ›

In the foreign exchange markets, leverage is commonly as high as 100:1. This means that for every $1,000 in your account, you can trade up to $100,000 in value. Many traders believe the reason that forex market makers offer such high leverage is that leverage is a function of risk.

What is leverage for dummies? ›

Leverage is typically expressed as a multiplier rate (like 10 times or 20 times) or a ratio (like 10:1 or 20:1). If the leverage rate is 10-times/ratio is 10:1, for example, and you have $1,000 of available margin, you're able to hold a maximum position equal to $10,000.

What happens if you lose a trade with leverage? ›

In leverage trading, you're required to maintain a certain amount of equity (initial margin) in your account to cover potential losses. If the market moves against you and your account falls below the required margin, you will face what is referred to as margin call.

Is leverage good for beginners? ›

Another thing with high leverage is that it will make you overtrade and overextend yourself, which is not the best way to go if you are a beginner. Therefore, it is wise to start with a low leverage ration to grow your account successfully. A simple definition of leverage is basically borrowing money to invest.

What is the best leverage for $100? ›

The best leverage for $100 forex account is 1:100.

Many professional traders also recommend this leverage ratio. If your leverage is 1:100, it means for every $1, your broker gives you $100. So if your trading balance is $100, you can trade $10,000 ($100*100).

Is it better to trade with or without leverage? ›

Trading without leverage can be considered a more conservative approach to trading forex, as it significantly reduces the risk of losing more money than you can afford. Not using leverage means you can only execute trades you can afford with your account balance.

What leverage to use when scalping? ›

What Scalping Is and How to Scalp. Scalping consists in using very high leverages — typically 1:1000 or even 1:3000 — to open trades on pairs with a low spread, aiming at a small target in terms of pips, usually compensating the higher risk exposure with tighter stop-losses.

Is 10X leverage risky? ›

If you have 10X average leverage use versus 1X while trading the same instrument you are taking more risk in the 10X scenario even if you manage stops, drawdowns, etc. The risk can come in different forms such as how little volatility is needed in an underlying asset for a stop or series of stops to be hit.

Is it safe to trade with 1:500 leverage? ›

In summary, 1:500 leverage is a powerful tool in the world of trading that allows traders to control larger positions than they could with their own capital. It comes with significant risks, such as increased potential losses, margin calls, and forced liquidations.

Is 1/1000 leverage good for beginners? ›

With 1:1000 leverage, a market move of just 0.1% against a position could result in a complete loss of the initial investment. Therefore, traders must have a thorough understanding of risk management techniques, including the use of stop-loss orders and proper position sizing.

Is it safe to trade with 1 500 leverage? ›

In summary, 1:500 leverage is a powerful tool in the world of trading that allows traders to control larger positions than they could with their own capital. It comes with significant risks, such as increased potential losses, margin calls, and forced liquidations.

Is 1 500 leverage too much? ›

500:1 leverage means you can initiate a position valued at 500 times your capital. That could be profitable, or it could wipe out your capital if the price moves 0.2% against you. Leverage varies around the world, with some countries only allowing up to 30:1. There's no reason to use that much leverage.

What leverage is good for $100 account? ›

The best leverage for $100 forex account is 1:100.

Many professional traders also recommend this leverage ratio. If your leverage is 1:100, it means for every $1, your broker gives you $100. So if your trading balance is $100, you can trade $10,000 ($100*100).

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