You can trade with leverage too. But what will you get? Is it good or bad? Well, we are going to tell you over here in this blog post. Trading with 1:500 leverage or 1:1200 is often considered as a highway to hell.
BEWARE: Leverage can be very risky and lead to big losses.
Make sure you understand it before to risk your money.
What is Leverage?
If you want to multiply the buying power by borrowing cash from the broker, then it is called leverage. There are a lot of brokers who offer different leverages. These include from 1:2, and up to 1:500 leverage or more.
What does thing mean? This thing means that you are multiplying the balance of the account by the factor in order to give more than the buying power.
For Example, if you are having $10 thousand dollars in the account. In addition, the broker is going to give you 1:1500 leverage for trading. In this case, it means that you will be able to trade almost $150,000. You can simply calculate it 15 multiplied by $10,000
Amount of Leverage A Broker Can Give
There is no specific answer to this question. Every broker sets its own guidelines and regulations. They carry them out by following different steps that can also carry out limits for maximum leverage.
You can typically get leverages within the following ranges:
- 1:10 when you trade the cryptocurrencies
- 1:20 when trading stocks
- 1:200 when trading futures/indices
- 1:500 or more to trade forex
But these values change from one broker to another depending upon the situation. The CFS brokers trade forex. Why? The reason is that they offer the maximum leverages.
Difference between Margins and Leverages
The leverages provided area directly correlated with the margins. When you are making an acquisition, the broker will latch the specific part of the balance that will serve as a margin. For example, you are purchasing ten shares of almost $200 stock. So, if you are making a purchase without any leverage, you will need $2,000. We calculated it by 10 multiplied by $200.
Now, let’s suppose your broker is giving 1:10 leverage. Then it shows that you can easily buy $2,000 valued shares in just $200. The amount you add will be locked whereas you are having a position open. And this thing is called the margin.
This thing means that you divide the purchase value that you are making by the ratio of leverage for getting the basic margin.
What is a Margin Call?
At the first point, you have is a locked margin. This margin is no more than an assurance that a broker eventually is getting. When almost overall positions get in the red territory, the total loss eventually gets close to the amount of margin.
If your loss gets very near to the margin that is available. Then it is the time when the main problem starts. And it is the time, you will have the call. When anyone reaches this level of loss, then they get the three main options:
- Depositing more money into the account for increasing the available margin
- Closing some of the positions in order to release the margin for others
- Do nothing at all and hope the best will happen
Here is the one thing that you must notice is that if the buyer will do nothing, the dealer can start to close the points at his own choice.
What Option to Choose?
Here we must say that any buyer must not choose any of the above options. Instead, you can let the account reach the worst parts, and you must trade with protection. What does this mean? It means that you must plan the trades. Then you must place the appropriate stop loss. Moreover, risk a small amount of the account.
Many people ask if there is another thing that is poorer than having a specific margin call. The answer is yes.
You can put your accounts in a place where the broker cannot close all your trades and time. And it results in ending up down more than that you deposited earlier. There are many scenarios that you need to understand.
In 1st scenario, the daily or weekend gaps usually occur. This one is the utmost common one. Why do these gaps appear and what will happen if the markets are open after a short time? The greater a market will close, the bigger the gap will be there.
You might have seen that whenever the market reopens, there is a change in the price. Why does this happen? The reason is that the sentiments of the trader may change due to external factors. This thing usually happens when news is unconfined during the close period.
But do you know that it can also work in the favour as well? But they can completely wipe the accounts if you use a big amount of leverage and also the value gaps in contradiction of your accounts.
In the second scenario, there are usually violent market crashes or moves. One of the greatest popular market clatters was in 2015 with CHF/EUR. Do you know that the prices were pegged to EURO? Moreover, they were reserved at levels that are above 1:200 for the previous four years.
Millions of money were issued through the Swiss National Bank for buying the EUR and keeping the peg.
For almost 4 years, the trade of CHF/EUR was really easy. Many people waited for the value to derive to 1.2000 close and that will make a good deal. But things went unplanned over there. The Swiss National Bank proclaimed that they are going to abandon the CHF/EUR peg. This thing made a collapse of EUR against CHF. There was a 20% instant market collapse as well. Even famous brokers like Alpari UK also went bankrupt.
What was the reason?
There were dealers that were fixed trading in contradiction of the collapse. They violated the stop losses and the trades closed far from what they were supposing. The issue that occurs here is excessive leverage uses. It can be 1:200 leverage or 1:500 leverage or another.
As an outcome, there were hundreds of dealers who were having negative balances in their accounts. As a result, they were unable to pay them back to their brokers.
The third scenario is about the circuit breakers. It is the worst enemy of all day traders. The day traders usually essential to use a great deal of leverage. The reason is to become capable to get certain decent profits by carrying out small moves.
Whenever things get overloaded, the circuit breaker gets triggered. This is similar as we have electric circuits in our homes. These are used for reestablishing the marketplaces when an asset or index transfers in a small time.
The trading is paused for at least fifteen minutes before you restart it again. Suppose, you are trading Dow Jones, and then you also set the small stop loss. Here the chart stops moving. After 15 minutes, you will see that again the value starts to move. Here is a vast gap. This thing triggers the stop loss and it is mode beneath the level that you are already having.
The same thing occurred during the covid. Here, the question is how bad you can damage your account if the loss is 10 times bigger? It can be bad.
But you can take several important measures that will aid you to dodge such events. Below are the measures:
- The first thing you need to do is be conscious of all the news releases. Especially you need to take care at weekends or after the marketplace closes. These changes the sentiments of the traders and markets may usually reopen with huge price gaps.
- Another important thing to keep in mind is that you must check to reduce the leverage that can result in market crashes. Just like that happened in 2020.
- Thirdly, you must also lessen the time visible to the marketplace. The greater the leverage you will use, the fewer period you must take to open your trades.
- Lastly, but the most important point is that do not practice leverage at all. You must avoid leverages. It will help you keep your trades safe.
Advantages and Disadvantage of leverages up to 1:500 leverage
Everything comes with its features and also negative points. The same goes for trading. Whether it is 1:5 or 1:500 leverage. 1:500 leverage, 1:200 leverage – Win Big or Blow your Account?
Without leverage, there is no concept of trading.
The first important thing is that you can easily trade minor moves and also get decent revenues.
You can grow faster if you are a consistent trader that makes huge profits.
One of the major problems is that you will have to pay the interest fee to the broker. Moreover, you can get big losses.
You can win big amounts, but most chances of leverage are that you can blow your accounts and get nothing in return. We do not recommend taking leverages especially 1:500 leverage.