Leverage involves borrowing funds to gain larger exposure in the market with the use of a smaller amount of initial capital known as Margin. For a quick recap on the basics, see our video ‘CFDs 101: What is margin and leverage?
Being able to trade CFDs using leverage offers the ability to trade all market conditions, especially through shorting. However, having access to larger market exposure means even slight market movements can result in larger profits or losses. Here’s a short video that explains this further.
Let’s look at the benefits
First of all, leverage opens up the ability to access markets previously enjoyed only by the big money players because historically gaining access to these markets required large amounts of capital.
Leverage allows the trader’s account capital to go further. By placing a percentage of the account as a margin, you can subsequently get multiple positions on various contracts. Which leads us into the third benefit-
Diversification. More positions allows different positions, reduced correlations and more trading strategies to play simultaneously.
And finally, Leverage opens up a new world of opportunity for traders wanting to express a view, their way, long and short, across an extensive product range such as forex, equities, indices, commodities and ETF CFDs.
What are the Risks?
However, leverage is not without its risks and can magnify two key mistakes retail and even pro traders typically make-
- The first is overconfidence: If your trading goes through a run of good form you may overestimate your ability to predict the markets. This would lead to you increasing position size or your leverage. Subsequently, if the market were to turn and a trade goes against you, it could lead to a bigger loss.
- Over trading: With greater flexibility to trade, the greater the freedom to place more trades - this can lead to increased transaction costs if not dealt with in a disciplined way.
Consider the sizes of your trades relative to your account balance and risk appetite and always consider tools such as a Stop Loss when trading with leverage.
Learn more about trading CFDS
Here at Pepperstone, our customers love the product range along with the low cost to trade and the fact so many markets are open around the clock. Interested? Watch the more videos to learn or speak to our team about whether CFDs are right for you.