What is Leverage Trading?
As a trader, you can open positions far greater than the sterling balance in your account. This can be done by way of leverage trading, or margin trading. By investing a percentage of the total position in a trade, you can trade the entire position thanks to leverage trading. Multiple factors affect the leverage on financial instruments, including the platform, the choice of financial instruments, and the broker you’re working with. Today, many professional brokers routinely offer competitive leverage to traders. The ratio between the position value and the investment required is known as leverage, while margin refers to the percentage of the position that is required. For example, if leverage of 100: 1 is available, and the margin requirement is 1%, a trader could open a £10,000 position with just £100.
Why Do UK Traders Enjoy Using Leverage?
There are many reasons why traders in Britain enjoy using leverage as one of their trading tools. These include the following:While many financial instruments are relatively cheap, and many traders can access them, others are more expensive. These luxury financial instruments are relatively more expensive to trade.
- Leverage helps traders to benefit from these prestigious financial instruments by investing only a fraction of the position size i.e. margin to open trades.While leverage trading, or margin trading, has less capital involved which can be a major advantage for many traders, it also comes with a loss risk. As one can gain much more than his initial investment, losses can occur on the same scale. It is important to keep track of opened positions, and apply stop loss and other market orders in order to prevent large scale losses.
- A caveat is in order with leverage or margin trading: The upside benefits are huge, but the risk of loss is equally great. When you’re trading with leverage, market movements can result in gains or losses. It is entirely possible to gain significantly more than you invested, but markets can also move in the opposite direction. That’s why it’s important to employ loss prevention measures such as stop loss and market orders to guard against capital loss.
leverage trading in action
If the price of an ounce of gold is $1327, and you believe that the gold price is going to rise, you may open a large position on gold by purchasing 10 units of it. Note that gold is denominated in USD, not GBP. If you go long on gold, the price of 10 units will be $13,270. For many traders, this is a large amount to have in a trading account, and the only way to trade such a position would be with leverage. Assuming 200:1 leverage – as offered by AvaTrade UK – you would have a 0.50% margin. This means that you would require 0.50% of the trade amount in cash to trade. For every $200 worth of this position of gold, you would require $1 from your account. The total requirement (margin) for this position is $66.35.
What are Margin Calls
To use leverage, you’re required to have enough funds in your account to cover potential losses. Brokers will have different margin requirements, and here at AvaTrade UK, we require that you have equity equivalent to 50% of used margin for MT4, AvaOptions and AvaTradeAct accounts. In the above example of 10 units of gold at $13,270, for MT4, AvaOptions and AvaTradeAct accounts, your leverage of $66.35 will require you to have 50% of your used margin available in cash. That means you will need $33.18 to keep your positions open.
This ensures that your positions will be kept open. If your 50% threshold is not maintained, AvaTrade UK will close out your positions, otherwise known as a margin call. On MT4 – MetaTrader 4, the largest losing position will be shut down first, and then positions will continue to be closed until your equity level reaches the 50% or greater threshold of used margin.
How to Use Leverage in Your Trading at AvaTrade UK?
Each financial instrument at AvaTrade has different leverage. The ratios can change based on many criteria, including the platform you have chosen. For example, AvaTradeAct offers you leverage of 200:1, while MetaTrader 4 (MT4) offers leverage of 400:1. Most currency pairs offer the highest possible leverage, while precious metals like gold offer leverage of 200:1, and energy commodities like crude oil offer leverage of 100:1. Platinum and silver offer leverage of 50:1. Be sure of the leverage offered on platforms and with specific financial instruments before you initiate trades. This is important, because you want to avoid any pitfalls that may occur with margin calls. Always maintain enough liquidity in your account to avoid these margin calls, and continue trading without interruption.