Explaining How Leverage Affects CFD Trading
When it comes to CFD Trading facts and nature, several traders find interest in the promising profit brought by the power of leverage. We say that margins makes a particular instrument become a potential source of amazing profit through the assets ample movement of percentage as well as provision of wide opportunity for market exposure. Our goal for today’s post is to give you a clear perspective on how leverage becomes an advantage and a disadvantage in your trading sessions.
How Leverage Work for Your Trade
The moment you pick to trade with leveraged items, you become aware that leverage can make your income grow bigger than trading with non leveraged commodities. In a usual trading scenario, a client can make some money from brokers in order to be given a chance to get into bigger markets. Let us use the case of forex trading as an example to explain the mechanics of leverage. Most forex traders require traders to meet a certain amount to open a trading account. This initial amount is called margin. For the cost, they could charge as little as 50:1 up to 500:1. The rate required varies from one broker to another. The rates basically depend on trading instruments, brokerage and trader’s risk profile.
The leverage for a client who picks 50:1 means that a trader should receive a daily 2% of the overall amount of the deal that is available in cash. Thus to be able to deal $100,000 of the underlying currency in a CFD contract, the trader only needs an input of $2,000 to serve as a starting and maintaining balance of the trading account instead of paying the full value amounting to $100,000. When it comes to forex rate movements or pips, a trader with $10,000 in his account and with 50:1 leverage can make a deal in CFD trading amounting to $500,000. This amount ($500,000) is equal to 5 standard lots in currency exchange. We can therefore derive that each pip movement only costs $50. Hence, if the commodity moves upward by 50pips, the gain would be pegged at $2,500 in long position. On the contrary, if the rates move against his position, he also loses the same amount as the target gain.
How Leverage Becomes a Disadvantage
Computation for profits and losses in CFD Trading can be quite scary for traders because it is dependent on the full contract value of the asset. This then means that if you can gain up to 200x because of leverage, you can also lose as much as 200x of your position. Thus, it means that the worst effect of a single loss with too high leverage could end your account. If you don’t want to lose your account, you have to put in an additional fund to maintain the required margin.It is also important to note that a trader who enters into a leveraged trade waves his right to get paid for dividends. It then goes to show that instead of getting dividends from losing a position, your loss will even be deducted to your account. This makes it feel like a double jeopardy for the trader.
Now that we have disclosed how leverage becomes a friend and an enemy to CFD traders, it is advisable for a trader to have effective strategies that could help them decide up to how much leverage they should risk in a particular trading session.