Leverage, otherwise known as risk level, is a temporary loan given to the trader by the broker. It enables you, as the trader, to open a trade of a larger size with a smaller amount of invested capital. Leverage is presented in the form of a multiplier that shows how much more than the invested amount a position is worth.
The best way to understand leverage is through an example of how it affects your profit or loss potential. If you trade with no leverage at all and invest $1,000, for every 1% move in the market you can gain or lose $10, which equals 1% of $1,000.
In comparison, if you were to invest the same $1,000 and trade using x10 leverage, the dollar value of your position would be equal to $10,000.
1% of $10,000 equals $100, so for every 1% move in the market you can gain or lose $100.
When opening a trade, you can decide if you wish to use leverage or not. Different instruments have different maximum leverage amounts, in accordance with applicable law, but eToro may choose to decrease the leverage on offer at any time.
The following maximum leverage amounts are defined by the European Securities and Markets Authority (ESMA), and apply to all retail clients at eToro:
- x30 for major currency pairs (such as EUR/USD)
- x20 for non-major currency pairs (such as EUR/NZD), Gold and major indices
- x10 for commodities other than Gold and non-major equity indices
- x5 for CFD stocks and ETFs
- x2 for cryptocurrency (due to the current high volatility in crypto markets, and the risk it presents, eToro has disabled the ability to open leveraged crypto positions.)
Please note that the use of leverage carries with it a higher degree of risk because leverage augments both gains and losses. If you use leverage on a trade and the market moves against you, your loss per pip will be greater than if leverage had not been applied.
For more information about Leverage, please take a look at the following link: https://www.etoro.com/trading/