More About Leverage

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How Does Leverage Work in Forex Trading?
Along with being able to access a wide range of financial markets, another benefit of trading CFDs is that a trader can access a much larger portion of those markets, and increase their potential profits as a result. CFD contracts provide leveraged access to the market, meaning a trader can access a much larger portion of the market than what they would be able to purchase outright.

To use Gold CFD as an example, at the time of writing, to purchase an ounce of Gold you would need to spend 1,200 USD. However, with a leverage rate of up to 1:20 (which means a trader could trade up to 20 times the value of what they deposit), a trader could trade on the full value of an ounce of gold (equivalent to 1,200 USD), for a deposit of just 60 USD.

Similarly, if you wanted to purchase 3,000 USD with Euros, that would cost 2,570 EUR. With a leverage rate of 1:30, however, you could access 3,000 USD worth of the EUR/USD currency pair as a CFD with just 100 USD. The best part, however, is that the size of the potential profit a trader could make is the same as if they had invested in the asset outright. The risk here is that potential losses are magnified to the same extent as potential profits.

Forex CFD trade (1:20 leverage)Traditional trade
You depositUS $500US $10,000
EUR/USD trade opens at 1.16766, closes at 1.16926, a difference of 0.00200You make US $200, or 40%You make US $200, or 2%
EUR/USD trade opens at 1.16766, closes at 1.16532, a difference of 0.00234You lose US $234, or 46.8%You lose US $234, or 2.34%
 

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