How does leverage trading work?

Last Updated: 15. Januar 2024By

Whoever holds the longer lever often has a good chance of ultimately being the winner. Unfortunately, this is not the case with trading. A large lever or a trade with a lot of leverage can quickly backfire.

Famous are the frequent liquidations in the crypto market, when investors have once again leveraged their bets on rising or falling prices. Cryptocurrencies already fluctuate enough without leverage. Those who are caught on the wrong foot can quickly go bankrupt.

However, those who carefully choose their leverage can benefit from it. With a small leverage of 2 to 5, you can use the trends of stocks or indices in the medium term. While your portfolio won’t explode, you can increase your profits by 2 to 5 times.

Leverage trading with CFDs is different. This applies if you become active in the forex market. Currency pairs are traded using margin. This is roughly an inverse lever, but with the same function. The margin rate for small investors usually starts at 3.3 percent. However, this is never presented on broker websites in this way.

Instead, you will read something like leverage 30:1. This is ultimately just the leverage. You can open a position that is worth 30 times the amount. This allows you to trade larger sums with small accounts and earn more accordingly.

However, you can also lose more. It is no coincidence that CFD brokers now always display on their homepage how many percentage of their investors burn their money. Usually, the numbers are between 65 and 70 percent. This means that two thirds of private investors generally lose money in CFD trading. The rest may break even, but are still in the red because trading fees are added.

I would find it more interesting if the statistics of profitable traders were also displayed. „70 percent lose money, 20 percent waste their time and earn nothing, and the remaining 10 percent have exceptionally had a positive year.“ That’s how I could imagine real numbers. Because one thing is clear: Most people gamble with CFDs and do not have a proper trading plan.

But even if there is a plan, it is still difficult to stick to it. No matter how many traders I talk to, if they have little experience, they always deviate from their own rules. And those who break the rules get shown the yellow card by the market. But this warning is often not enough. They continue to improvise and trade based on gut feeling because the chart has subtly sent them messages.

Consistent trading with a lucrative strategy is why I do such extensive backtesting with the 1+3 indicator. We need a lot of data to be able to be even remotely sure that the strategy works. If successful tests are not a guarantee for future profits, then at least the results in the past should be successful.

For the planned implementation using copy trading, I will use leverage of 500:1. This way, we can place multiple trades with 5 percent risk and still have plenty of margin left. Because the most beautiful system is useless if we are stopped out by the broker because our security is not sufficient.