Well, let’s start by explaining exactly what leverage is and then we can proceed to defining high leverage trading based on the first definition. Leverage is a word used in investing and trading to refer to the ability to control a large amount of money using very little money. Common examples of leverage include debt where the lender allows you to make a purchase on credit that is, using money you do not have/own, and then repaying later. The same logic applies to trading where leverage is a feature created by most brokers to allow traders/investors to control assets worth way more than their account balance. For example, a broker who offers 1:20 leverage is basically allowing a trader to open trades that are worth up to 20 times their account balance.
Well, there is no standard definition of high leverage but given that most major regulators cap the leverage on most tradeable products at 1:30 to 1:50, most experts regard leverage that exceeds these standards as being high leverage. Therefore, we can comfortably classify leverage levels greater than 1:50 as being high leverage. Brokers who offer leverage levels starting at 1:100 up to 1:1,000 are generally classified as high leverage brokers based on the above standards.
Most of the stringent regulators such as the U.K’s Financial Conduct Authority (FCA) and the Australian Securities and Investment Commission (ASIC) limit the leverage that licensed brokers can offer their clients to a maximum of 1:50. However, not all global regulators have such limits, which has made it possible for brokers to offer higher leverage by registering with more lenient regulators. Brokers who offer high leverage are usually licensed by regulators such as the Cyprus Securities and Exchange Commission (CySEC), the Financial Services Commission (FSC) of Mauritius, and the Malta Financial Services Authority among others.
Some major brokers who are regulated by strict regulators such as the ASIC and FCA also offer high leverage trading by operating subsidiaries licensed by other lenient regulators. Therefore, you might find that a major broker that is regulated by the FCA or ASIC also offers high leverage trading through subsidiaries domiciled in other jurisdictions. Beware of the fact that if you have a trading account that allows you to trade with high leverage levels, you are likely not protected by the stringent requirements of the tough regulators. For example, the FCA guarantees the protection of investor funds up to 50,000 pounds in case a regulated broker goes bankrupt and customers’ funds are lost. The US Commodities Futures Trading Commission also offers similar protections to investors in regulated brokers and funds.
However, you might not be covered by the guarantees offers by such regulators despite your broker being licensed by them if your account allows for extra leverage, which means that your account with the broker is held under a subsidiary registered in a less-stringent jurisdiction.
You can basically trade most of the instruments offered for trading using high leverage if your broker allows it given that most brokers are not directly connected to a central exchange. Therefore, most of the instruments you can trade with a high leverage brokers, such as EagleFx, are derivatives of the actual tradeable asset. For example, most brokers offer some stock CFDs, which give Forex traders an opportunity to take both long and short trades without stringent margin requirements. The same would not be possible when trading the stock via a broker connected directly to the stock exchange as they would have to abide by the exchange rules.
Trading with high leverage is a two-edged sword as the potential return are quite high and so are the potential losses. High leverage brokers allow you to trade lot amounts that you would never trade on an account that only allows leverage say up to 50:1. For example, it is not surprising to see a trader with a $500 account making trades worth up to 5 lots, hence, risking their entire account balance if they make a 10 pip loss. Most conservative brokers would not allow a client with a $500 account balance to make trades that exceed 0.5 lot since this gives the trader a 100 pip safety margin.
Therefore, you should take such factors into consideration when considering whether to make high leverage trades or conservative trades. Remember that your ultimate goal as a trader is to control your risk so that you can last in the markets long enough to become a profitable trader. Trading with high leverage is one of the fastest ways to ensure that you have a very short trading career as the risk of blowing your account is quite high.
Some of the popular high leverage trading products available in the markets include inverse and leveraged ETFs. The Lyxor EURO STOXX 50 Daily (2x) Leveraged UCITS ETF is a popular high leverage product among traders tracking European markets. Other popular high leverage regulated products include inverse US stock index ETFs such as the ProShares UltraPro Short S&P 500 (SPXU) and the ProShares UltraPro Short Dow30 (SDOW).
These high leverage products allow you to compound your profits by up to 3X the actual movement in the underlying stock index, but they also compound your losses. Therefore, you have to be aware of your full risk exposure when trading such products to ensure that you do not blow your account when prices move against you.
High leverage Forex products come in the form of the number of lots traded whereby trading very high lots is considered a high leverage activity if your account balance cannot handle the potential losses inherent in such a trade.
Always remember that trading with high leverage is a two-edge sword and you should always tread with caution when using high leverage levels in your trading.
People Who Read This Article Also Read: