What is leverage in online trading?

Leverage is one of the many terms you’ll hear floating around in the online trading world. However, not everyone understands what it means. In this guide, we’ll talk about what leverage is, how it works, and what markets you can trade with it.

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What does ‘leverage’ mean in trading?

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Leverage is a crucial aspect of CFD trading. It refers to using borrowed funds to increase your trading position beyond what your cash balance allows.

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Many traders take advantage of leverage to improve their strategies and maximise their potential gains. But, there’s a catch to leverage: it can also result in larger losses than expected, especially if it’s not used strategically. That’s why you should carefully analyse the markets and be sufficiently confident leverage will benefit you before applying it to your trades.

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How does leverage work?

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Leverage allows you to open larger positions with a smaller amount of capital. For instance, with leverage of 1:100, you can control a position worth $1,000 with just $10 of your own money.

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Higher leverage means you need less capital to open a trade, boosting your purchasing power and enabling you to capitalise on smaller price movements.

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Margin refers to the deposit required to open a leveraged position, taking into account spreads, leveraging, and currency conversions. You use a margin calculator to determine how much margin you need to increase the market value of your position.

Leverage example

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For example, if an asset costs $100 and you use 1:100 leverage, the margin required to open one CFD would be $1. If you decide to buy 100 CFDs and the asset price rises to $105, your profit would be $500 (100 CFDs x $5 gain per CFD). Conversely, if the price drops to $95, your total loss would be $500.

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Based on these outcomes, leverage can increase profits, but it can also increase losses.

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Leverage trading - Risk management

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Leveraged trading carries significant risks, so it's crucial to use risk management tools to protect your investments. Traders can utilise stop loss and take profit orders to manage potential losses and secure gains.

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Stop Loss Orders

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A stop-loss order automatically closes your position at a specified price to limit potential losses. By setting a stop loss, you determine the maximum amount you're willing to lose on a trade, helping you avoid unexpected losses as the market moves against you.

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Take Profit Orders

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A take-profit order automatically closes your position when the asset reaches a target price, locking in your profits. This tool ensures that you capture gains before the market potentially reverses, allowing you to secure your profits without having to constantly monitor the market.

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By employing these risk management strategies, you can better control your exposure and protect your capital in leveraged trading.

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Markets to trade with leverage on Deriv

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The markets you can trade with leverage on Deriv are forex, stocks and stock indices, cryptocurrency, commodities, and derived indices. Each of these markets operates differently so it’s important to be careful when trading them with leverage. You can trade them on Deriv MT5, Deriv cTrader, and Deriv X.

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Forex

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Get access to over 50 popular currency pairs and trade with leverage of up to 1:1000 to maximise your market exposure.

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Stocks and indices

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Take advantage of competitively priced equities and asset baskets — from your favourite household brands to international indices — available to trade with leverage of up to 1:10 on stocks and up to 1:100 on indices outside regular stock market trading hours.

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ETFs

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Diversify your trading with a range of leveraged ETFs, providing exposure to multiple sectors, commodities, and markets. Maximise your potential with leverage of up to 1:5.

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Derived indices

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Derived indices consist of synthetics, basket indices, and derived FX. Trade synthetics round the clock with leverage of up to 1:6000. These indices simulate real-world market movements, offer constant volatility, and are free of liquidity risks.

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Commodities

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Predict the price movements of commodities such as silver, gold, and oil and benefit from leverage of up to 1:500 to boost your potential gains.

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Cryptocurrency

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Trade the world’s most popular cryptocurrencies with over 17 crypto pairs to choose from. Benefit from this highly liquid market with leverage of up to 1:100.

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Summarising leverage in trading

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Many see leverage as a double-edged sword but once you learn how it works, you can manage the risk. If you’re a beginner, starting small is a smart way to work your way around it. No matter how tempting the leverage ratio is, it’s never a good idea to head straight for large amounts, as doing so may completely impact your trades. 

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To learn more about how leverage in trading works, sign up for our free courses on Deriv Academy or practice trading with leverage with a free demo account that’s pre-loaded with 10,000 USD virtual money. 

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Log in to Deriv Academy using your Deriv account email and password to get started.