Leverage lets a small deposit control a large position. It is the most powerful — and most dangerous — feature of CFD trading. Here is how to use it without it using you.
Leverage is the mechanism that lets you control a position far larger than your deposit. Expressed as a ratio such as 1:100 or 1:500, it tells you how much market exposure each unit of margin commands. At 1:500, a $200 deposit can control a $100,000 position. That power is precisely why leverage demands respect.
How the maths works
If you control a $100,000 position and the market moves 1% in your favour, you gain $1,000 — potentially several times your margin deposit. But a 1% move against you costs the same $1,000. The percentage move on the full position is what drives your profit and loss, not the percentage move on your margin. This is the core reason leveraged trading can erase an account quickly.
Margin calls and stop-outs
As a losing position erodes your equity, your broker monitors the margin level. If it falls below a required threshold you receive a margin call, and if it falls further the broker may automatically close positions — a stop-out — to prevent your balance going negative. Higher leverage shortens the distance between entry and stop-out.
Leverage is not free buying power. It is borrowed risk. The skilled trader treats high available leverage as a ceiling never to be approached, not a target to be hit.
Effective leverage is the number that matters
The leverage your broker offers is a maximum, not a recommendation. What matters is your effective leverage — total position value divided by your equity. Disciplined traders keep effective leverage modest, using only a fraction of what is available so that a normal adverse swing never threatens the account.
Because leverage magnifies losses, position sizing and stop placement are not optional extras — they are the difference between survival and ruin.
This lesson is provided for educational purposes only and does not constitute investment advice or a recommendation. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Past performance is not indicative of future results.
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