Difference Between Maximum CFD Leverage Set by the Broker & Used CFD Leverage
If the set cfds trading leverage is 100:1, it means that you can borrow upto 100 dollars for every dollar that you have in your cfd account but you don't have to borrow all the 100 dollars for every dollar you have, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage option set 100:1 your used cfd trading leverage will be the 50:1 or 20:1 that you have borrowed to make a trade.
Example:
You have 1000 dollars (Equity)
Set 100:1
CFD Leverage Used = Amount used /Equity
If you buy trading lots that are equal to 100,000 dollars you will have used
= 100,000/1000
= 100:1
If you buy trading lots that are equal to 50,000 dollars you will have used
= 50,000/1000
= 50:1
If you buy trading lots that are equal to 20,000 dollars you will have used
= 20,000/1000
= 20:1
If you buy trading lots that are equal to 10,000 dollars you will have used
= 10,000/1000
= 10:1
In these 3 cases you can see that even though the set is 100:1
The used is 100:1, 50:1, 20:1 and 10:1 depending on the size of lots traded.
So Why not Just Select 10:1 option as the Maximum CFD Leverage? Because to keep within proper risk management rules it is even recommended that investors use less than this?
This question might seem straight forward but it is not, because when you trade you use borrowed money known A.K.A. CFD Leverage. When you borrow capital from anyone or a bank you must maintain security or collateral to acquire loan, even if the security is based on the monthly deduction from your salary, same thing with CFD.
In cfd the security is known as margin. This is capital you deposit with your broker.
This is calculated in realtime as you trade. To keep your borrowed money you must maintain what is known as required capital (your deposit).
Now if Your CFD Leverage is 100:1
When trading if you have $1,000 & use option 100:1 and buy 1 standard lot for $100,000 your margin on this transaction is $1000 dollars in your account, this is money which you'll lose if your open trade goes against you the other $99,000 that is borrowed, they will close the open cfd trade transactions automatically once your $1,000 has been taken by the cfd trading market.
But this is if your cfd broker has set 0% CFDs Margin Requirement before closing your cfds trades automatically.
For 20% requirement before closing your cfds trades automatically, then your trade transactions will be closed once your trading balance gets to $200
For 50% requirement of this level before closing your cfds trades automatically, then your trade transactions will be closed once your trading balance gets to $500
If they set 100% requirement of this level before closing out your open trades automatically, then your trade will be closed once your trading account balance gets to $1,000: Meaning trade will close-out as soon as you execute it because even if you pay a One pip spreads your trading account balance will go to $990 and needed percent is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed out.
Most brokers do not set 100% requirement, but there are those that set 100% aren't suitable for you at all, select those set 50% or 20% margin requirements, in fact, those brokers that set it at 20% are some of the best because the likely hood they close-out your trade is reduced as shown in the example above.
To know about this level which is calculated by your platform automatically - The MT4 CFD Platform will display this as "CFDs Margin Requirement", This will be displayed as a percent the higher the percent the less likely your trades are to get closed.
For Example if
Using 100:1
If cfd leverage is 100:1 and you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 100:1, your used trading capital is $100
Calculation:
= Capital Used * Percentage(100)
= $1,000/$100 * Percentage(100)
CFDs Margin Requirement = 1,000 %
Investor has 980% above the required amount
Using 10:1
If cfd leverage is 10:1 & you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 10:1, your used capital is $1000
Calculation:
= Capital Used * Percentage(100)
= $1,000/$1000 * Percentage(100)
CFDs Margin Requirement = 100 %
Investor has 80% above the required amount
Because when a trader has a higher cfd leverage means that they have more percent above what's required(A.K.A. More "Free CFDs Margin") their open cfd transactions are less likely to get closed. This is reason why traders will choose the option 100:1 for their account but according to their risk management rules, these traders won't trade above 5:1.
These Levels are Shown on The Software Image Below as an Examples:
MT4 CFD Platform
