Explain What's CFD Trading Leverage? Explain What is CFD Trading Margin?
The definition of CFD Leverage is having the ability to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the cfd market to attract many investors.
We shall explain cfd leverage first and then explain cfd margin in this learn how to calculate cfd leverage and margin tutorial.
Example:
We shall us this example to explain what cfd leverage is? If your broker gives you cfd leverage of 100:1 (this is best option to choose as the maximum cfd leverage for any cfd trading account)
This means you borrow 100 dollars for every dollar you have in your cfds trading account.
To put in another way your cfd broker gives you 100 dollars for every 1 dollar in your trading account. This is what is known as leverage.
This means if you open an account with $1,000 & your cfds leverage ratio is 100:1, then you will get $100 for every $1 you that you have, the total amount that you'll control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 you'll get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Investment
Most new cfd traders ask what cfd leverage is best cfd leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars cfd account? - The best cfd leverage option to select when opening a live CFD Trading account is always 100:1 and not 400:1.
What is CFD Trading Margin?
CFD Margin is the amount of money required by your broker so as to allow you to continue trading with borrowed amount.
In other words the question what's margin in CFD? can be explained as the money required to cover open cfds trades and is expressed in percentage. For 100:1, amount you'll control is 100,000 dollars as explained in the above example.
Now can you compare a investor investing $1,000 with another one that is investing $100,000? Obviously Not. This is how it works: it takes you from that retail investor investing $1,000 to that investing $100,000. Where does this extra cash come from? - You borrow it from your cfd broker in what's simply referred to as Leverage. This money that you borrow, you borrow it against the $1,000 dollar of your own money which you deposit with your cfds trading broker. If you were to explain what this cfd trading leverage means - then it is ability to control a large amount of money using very little of your own money & borrowing the rest. Otherwise, if you were trade CFD Trading without this leverage it would not be as profitable as it is, in fact you can still select not to use leverage, using the 1:1 leverage option but you would not make money & it would take too long to make any profit.
Example of how to calculate cfds leverage and margin:
CFD Margin required in this case is 1,000 dollars (your money) if it's expressed as a percent of 100,000 dollars in your cfd account which you control it is:
If cfd leverage = 100:1
1,000 / 100,000 * 100= 1%
Margin required = 1%
(1/100 *100= 1%)
'Trade Forex Trading - Please simplify because I am Beginner'
(Simplify - your capital is $1,000 after cfd leverage you now control $100,000 - $1,000 is what percent of $100,000 - it's 1%) that's your margin requirement for your cfds trading account.
The cfd trading margin example explained and illustrated below, the set cfds leverage ratio is 100:1, the margin which is 1% is $2683.07, therefore the total amount controlled by cfd trader is: $268,307 - this is because with this leverage the trader has used little of his money & borrowed the rest, with this set at 100:1, the trader is using 1 % of their capital, this 1% is equivalent to $2683.07, if 1% is equal to $2683.07 then 100% is $268,307
CFDs Leverage and Margin Guide
- If = 50:1 Leverage
Then margin requirement = 1/50 *100= 2 %
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your capital is $1,000 after cfd leverage you control $50,000 - $1,000 is what percent of $50,000 - it's 2 %) that is your cfd trading margin requirement
- If = 20:1 Leverage
Then the requirement = 1/20 *100= 5 %
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your trading capital is $1,000 after cfd leverage you control $20,000 - $1,000 is what percent of $20,000 - it is 5%) that's your cfd trading margin requirement
- If = 10:1 Leverage
Then the requirement is = 1/10 *100= 10%
If you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10%
(Simplify - your trading capital is $1,000 after cfd leverage you control $10,000 - $1,000 is what percent of $10,000 - it is 10%) that's your cfd trading margin requirement
What's The Difference Between Maximum CFDs Leverage and Used Leverage?
However, you should note that there is a difference between maximum cfd trading leverage ( cfd trading leverage given by your cfd broker which is the highest cfd leverage you can trade with if you select to) and used cfd trading leverage ( cfd trading leverage depending on the lots you have opened/open trades). One is the broker's (Maximum CFDs Leverage) & the other is trader's (Used Leverage). To explain this cfd leverage concept we shall use cfd example above:
If your cfd broker has given you 100:1 Maximum CFDs Leverage, but you only open a trade of 10,000 dollars then Used CFD Trading Leverage is:
10,000 dollars: 1,000 dollars (your money)
10:1
Your have used 10:1 Leverage, but your maximum is still 100:1 Leverage. This means that even if you're given 100:1 Maximum CFD Leverage or 400:1 Maximum CFDs Leverage, you do not have to use all of it. It is best to keep your used cfd leverage to a maximum of 10:1 but you will still select 100:1 maximum cfd leverage option for your trading account. The extra cfd leverage will give you what we call Free CFDs Margin, As long as you have some Free margin on your cfd account then your trades will not get closed by your cfd broker because this margin requirement will remain above required level.
When it comes to cfd trading one of your rules: money management rules on your trading plan should be to use cfd trading leverage below 5:1.
In the above image examples, the trader is using $2683.07, total controlled amount is $268,307, but account equity is $16,116.55, therefore used cfds leverage is ( $268,307 divide by 16,116.55 ) = 16.64 : 1
16.64 : 1 Used Leverage
CFD Margin accounts allows traders to control a large amount of currency using little of their own while borrowing the rest
Obtaining this cfd account will enable you to borrow money from the broker to trade cfd lots with.
The amount of borrowing power your account gives you what is called "leverage", and is usually expressed as a ratio - a ratio of 100:1 leverage means you can control resources worth 100 times your deposit amount.
What this means in CFD Trading terms is that with 1% margin in your cfd trading account you can control a trade worth $100,000 with a $1,000 deposit.
However, Trading this cfds account increases both potential for profits as well as losses. In CFD Trading you can never lose more than you deposit, losses are limited to your deposits and usually brokers will close a transaction that extends beyond your deposited amount by executing a margin call. Traders must therefore try to keep their margin level above that required. By using money management rules & keeping your used leverage below 5:1.
