Professional Trading Education
Master the double-edged sword of leverage. Learn how to use margin effectively while protecting your capital from devastating losses in CFD markets.
Leverage is what makes CFD trading both attractive and dangerous. It allows you to control large positions with relatively small amounts of capital, amplifying both potential profits and losses. Understanding how leverage and margin work is crucial for any serious CFD trader who wants to survive and thrive in the markets.
CFDs are leveraged products that can result in losses exceeding your initial deposit. Studies show that 70-80% of retail CFD traders lose money, primarily due to misunderstanding or misusing leverage.
Never trade with money you cannot afford to lose, and always use appropriate risk management.
Leverage is essentially borrowed money that allows you to open larger positions than your account balance would normally permit. It's expressed as a ratio, such as 10:1, 50:1, or 100:1, indicating how much larger your position can be compared to your margin deposit.
$1,000 margin controls $10,000 position
Conservative, lower risk
$1,000 margin controls $50,000 position
Moderate, balanced approach
$1,000 margin controls $100,000 position
Aggressive, high risk
Margin is the deposit required to open a leveraged position. It's not a fee or cost, but rather a good faith deposit that's held by your broker while your position is open. There are several types of margin you need to understand:
The minimum deposit required to open a position. Calculated as a percentage of the total position value.
Initial Margin = Position Size ÷ Leverage Ratio
The minimum equity required to keep a position open. If your account falls below this level, you'll receive a margin call.
Usually 50% of Initial Margin
The key to understanding leverage is recognizing that it amplifies both gains and losses proportionally. A small price movement in your favor can generate significant profits, but the same small movement against you can cause substantial losses.
When your account equity falls below the maintenance margin level, your broker will issue a margin call. If you don't add funds or close positions, the broker will automatically close your positions to prevent further losses.
While brokers offer maximum leverage ratios, your effective leverage depends on how much of your account you actually use for trading. Smart traders use much less than the maximum available leverage.
Effective Leverage = Total Position Value ÷ Account Equity
Different jurisdictions have implemented leverage limits to protect retail traders. Understanding these regulations helps you choose appropriate brokers and trading strategies.
All positions share the same margin pool. Profits from one position can offset losses from another.
Better for portfolio management
Each position has its own dedicated margin. Losses are limited to the allocated margin.
Better for risk isolation
Leveraged positions held overnight incur financing charges based on the borrowed amount and prevailing interest rates.
Daily Financing = (Position Size × Interest Rate Differential) ÷ 365