how does leverage affect CFD trading?

@segun_33 - 8 months ago - Forex Education

Is it possible to trade CFDs without leverage? What is the role of leverage in CFD trading?

@brenda_lesotho - 8 months ago

CFD trading has to do with speculating on the price of an asset you do not own. So, for that to happen, you have to deposit some collateral with the actual owner of the asset who in this case is your broker.

Leverage is the formula that determines how much collateral you are going to have to deposit before trading can commence.

If the the total contract sum or total value of the asset is $100,000 then the leverage will determine what fraction of $100,000 you must deposit as collateral.

If your leverage is 1:500, then you must deposit $200 as collateral (meaning $100,000 divided by 500).

I hope this answers your question.

@karbin - 8 months ago

Yes, you can trade CFDs without leverage if you want to. You can set your broker's leverage to 1:1, and not use any leverage.

CFDs are derivatives mostly traded on margin, to speculate on instruments with lower capital. Using high leverage has it's risks, for example, you can go bust pretty quickly.

If you are trading 10 lots on EURUSD for example on a 1000 USD account, it takes just a 10 pips loss to lose your entire account equity. Stick to a lower leverage that you can handle.

@patrinova_athenia - 8 months ago

When leverage is high, the amount of money needed to open a trade is low and those trading with small accounts are gonna love this.

But there is some bad news, when you go for high leverage you are going to be nervous all the time of the trade because drawdown can come very fast and losses are huge. Being nervous as a state of mind is bad for trading because it breeds fear which in turn breeds irrational thinking ultimately leading to loss after loss after loss.