Leverage in CFD Explain What is CFD Trading Margin?
The definition of CFD Leverage is having the ability to control a big amount of money using very little of your own money and borrowing the rest - this is what makes the cfds trading market to attract many traders.
We shall explain cfd leverage first and then explain cfd margin in this learn how to calculate cfd leverage and margin cfd tutorial.
CFD Trading Example:
We shall us this cfd example to explain what cfd leverage is? If your cfd broker gives you cfd leverage ratio of 100:1 (this is the best option to select as the maximum cfd leverage for any cfd 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 cfd account. This is what's known as cfds trading leverage.
This means if you open a cfd account with $1,000 and your cfd leverage ratio is 100:1, then you will get $100 for every $1 you that you have, the total amount that you will control is:
If for 1 dollar the broker will give you 100
Then if you have 1,000 in your cfd account you will get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Capital after cfd trading leverage
Most new cfd traders ask what cfd leverage is best for 2,000 dollars, or 5,000 dollars, or 10,000 dollars cfd trading account? - The best cfd leverage ratio to select when opening a live CFD Trading account is always 100:1 & not 500:1.
What's CFDs Trading Margin?
CFD Trading Margin is the amount of money required by your cfd broker so as to allow you to continue cfd with the borrowed amount - leveraged amount.
In other words the question what is margin in CFD? can be explained as the money required by your cfd broker to cover open cfds trades and is expressed as a percentage. For 100:1 leverage, the amount you will control is 100,000 dollars as explained in the cfds trading example above.
Now can you compare an investor investing $1,000 with another investor investing $100,000? Obviously Not. This is how leverage works in cfd, it takes you from that guy investing $1,000 to that one investing $100,000. Where does this extra money come from? You borrow from your cfd broker in what is simply referred to as CFD Trading Leverage. This money that you borrow from your cfds trading broker, you borrow it against the $1,000 dollar of your own money that you deposit with your cfd broker in your cfds trading account. If you were to define what this cfd trading leverage means - then leverage is the ability to control a big amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade cfd trading without this cfd trading leverage it would not be as profitable as it is, in fact you can still choose not to use cfds trading leverage, using the 1:1 leverage ratio but you would not make money it would take too long to make any cfd trading profit.
Example of how to calculate cfd leverage and cfd margin:
CFD Margin required in this case is 1,000 dollars (your money) if it's expressed as a percentage of 100,000 dollars in your cfd account which you control it is:
If cfd leverage ratio = 100:1
1,000 / 100,000 * 100= 1%
CFD Trading Margin required = 1%
(1/100 *100= 1%)
"Trade Forex Trading - Please simplify because I am a CFD Trading Beginner"
(Simplify - your cfd trading capital is $1,000 - after cfd leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that is your cfd trading margin requirement for your cfd trading account.
The cfd margin example explained and illustrated below, the set cfd leverage ratio is 100:1, the cfd trading 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 and borrowed the rest, with this leverage ratio 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
Do You Have To Use Leverage In CFD?
- If = 50:1 CFD Trading Leverage Ratio
Then cfd trading margin requirement = 1/50 *100= 2%
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your cfd capital is $1,000 after cfd leverage you now control $50,000 - $1,000 is what percentage of $50,000 - it's 2 %) that's your cfd margin requirement
- If = 20:1 CFD Leverage Ratio
Then the cfd margin requirement = 1/20 *100= 5 %
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your cfd capital is $1,000 after cfd leverage you now control $20,000 - $1,000 is what percent of $20,000 - it's 5 %) that's your cfd trading margin requirement
- If = 10:1 CFD Leverage Ratio
Then the cfd trading margin requirement is = 1/10 *100= 10%
If you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10%
(Simplify - your cfd trading capital is $1,000 after cfd leverage you now control $10,000 - $1,000 is what percent of $10,000 - it's 10 %) that's your cfd trading margin requirement
What's The Difference Between Maximum CFD Leverage and Used CFD Trading Leverage?
However, you should note that there's a difference between maximum cfd trading leverage (cfd trading leverage given by your cfd broker which is the highest cfd leverage ratio you can trade with if you choose to) and used cfd trading leverage ( cfd trading leverage depending on the cfd lot size you have opened - open trade lots positions). One is the broker's (Maximum CFDs Leverage Ratio) and the other is cfd trader's (Used Leverage Ratio). To explain this cfd leverage concept we shall use the cfds trading example above:
If your cfd broker has given you 100:1 Maximum CFDs Leverage Ratio, 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 CFD Trading Leverage Ratio, but your maximum leverage ratio is still 100:1 Leverage. This means that even if you're given 100:1 Maximum CFD Trading Leverage Ratio or 500:1 Maximum CFDs Leverage Ratio, you do not have to use all of it. It is best to keep your used cfd leverage ratio to a maximum of 10:1 cfd trading leverage but you will still select 100:1 maximum cfd leverage ratio for your cfd 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 cfds trades will not get closed by your cfd broker because this margin requirement will remain above the required level based on the free margin in your cfds trading account.
When it comes to cfd - one of your rules: cfd money management rules on your cfd plan should be to use cfd leverage ratio of below 5:1.
In the above cfd trading example, the trader is using $2683.07, total controlled amount is $268,307, but cfd 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 CFD Trading Leverage Ratio
CFD Trading margin accounts allow cfds traders to control a big amount of currency using little of their own money while borrowing the rest
Obtaining this cfd trading margin account will enable you to borrow money from the broker to trade cfd trading lots with.
The amount of borrowing power your margin cfd account gives you what is called 'leverage', and is usually expressed as a ratio - a leverage ratio of 100:1 means you can control resources worth 100 times your deposit.
What this means in cfd terms is that with 1% margin in your cfd account you can control one standard cfd lot or 1 cfd trading contract worth $100,000 with a $1,000 deposit.
However, trading on this margin cfd account increases both potential for cfd trading profits as well as cfd trading losses. In cfds trading you can never lose more than you invest, cfd trading losses are limited to your deposits and usually cfd brokers will close a cfd trade transaction that extends beyond your deposit amount by executing a cfd trading margin call. CFD traders must therefore try to keep their cfd trading margin level above that required by their cfds trading broker. By using cfd trading money management rules & keeping your used cfd trading leverage ratio below 5:1.
What Is CFD Trading Leverage for Beginners? - Do You Have To Use Leverage In CFD? - Leverage in CFDs - CFD Trading Leverage Example - CFD Trading Leverage And Margin Explained - CFD Trading Leverage Calculator
