What is leverage? What is the leverage on eToro? These are the big questions that new traders on eToro always ask. In this article, we answer the above questions in detail.
What is leverage?
It is crucial to understand how leverage works for successful trading.
Let’s see an example. AAPL shares are currently trading around $116.
- 1x Leverage: If I use $116, I will get a share. Using a 1x leverage also means using “no leverage”. I use 100% of my money to buy stocks. If AAPL fails and the stock drops to $0. I will lose 116 dollars, equal to the amount I invested.
- 2x Leverage: Higher leverage means borrowing money from the broker to buy stocks. That means I can use $116 of my money. And the broker will lend me another $116. I can buy two shares (but I only have to spend $116). Or if I want to buy a stock, I will only pay half – 116/2 because the broker lends me the rest. If the company goes bankrupt and its shares go to 0. If I buy two shares, I will lose the $116 I invested. And I lost another $116 that the broker lent me. Here, I am losing more than I have invested.
The highest leverage levels (5x, 10x, 20x) are similar.
Leverage is a strategy by which an investor can multiply his purchasing power in assets. They open a trade with greater purchasing power with less investment by borrowing money from the broker. Leverage increases the potential return on an investment. But it can also be dangerous as it can increase the damage.
How does leverage work on eToro?
Any amount of leverage increases your investment with trading activity. It is thanks to your money loan from eToro. Suppose you increase the leverage of any trade. So this allows you to multiply the risk by the leverage ratio.
The coefficient (2x, 5x.10x) shows how much purchasing power you apply to your initial investment.
If you are thinking of increasing leverage, you need to consider:
- Assets have a different maximum leverage.
- What is your risk tolerance? Because you use leverage you can increase your potential loss, not just your profit.
- Leverage does not change the amount you invest. Change the transaction level and, therefore, the number of units in the transaction.
- All leveraged positions are traded as CFDs.
Margin Call and Stop-out
When using leverage, your trade is interfered with by Margin Call and Stop-out.
- A margin call occurs when the balance and unrealized profit and loss in an investor’s trading order are equal to the amount invested by the investor in the order. The broker requires investors to add funds to bring their accounts to the minimum value.
- Stop-out is the point where an investor’s capital is Margin Called. But investors lack capital to replenish. The trading platform automatically closes open orders.
We explain the above terms to make you understand. When you use leverage, if the market goes against your expectations, your leveraged trades may be closed by the broker. Because eToro needs to secure the amount to borrow transactions.
Minimum and maximum leverage on eToro
Minimum leverage As mentioned above, the minimum leverage is 1x. It means no leverage Maximum leverage Maximum leverage
For each asset class on eToro, there is a different maximum leverage.
eToro is a global trading platform. Therefore, the maximum leverage limits are determined by the competent authorities. And it changes based on the volatility of the asset. And eToro can deleverage at any time because the right to lend or not belongs to them. Below are the maximum levels of leverage available. For all retail clients of eToro (Europe) Ltd, eToro (UK) Ltd and eToro AUS Capital Limited:
- 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 non-gold commodities and non-major stock indices.
- x5 for CFDs and ETFs on shares.
- x2 for cryptocurrency CFDs.
For clients of eToro (Seychelles) Ltd:
- x400 for major currency pairs (such as EUR/USD).
- x100 for Gold and other commodities and key statistics.
- x50 for non-major currency pairs.
- x10 for unimportant indices, stock CFDs and ETFs.
- x5 for cryptocurrency CFDs.
How much is the leveraged trading fee on eToro?
The broker makes a profit by lending you money. When you open a leveraged order, you have to pay a commission. Fees depend on many factors, but you should always know the costs before trading. When placing an order, overnight and weekly fees are displayed on the trading interface.
You can find more detailed information on leveraged trading fees for each product here.
How to place a leveraged order
To use leverage on the eToro platform, follow these steps:
Step 1: Select the asset you are interested in and click on “trade”. Step 2: Next, choose whether you want to place a short sell order or a buy order. Step 3: Then, you set the amount you want to invest and your leverage factor. If you do not like to use leverage, you can choose “1x”. Step 4: The stop loss and take profit parameters are set. Step 5: Click “open trade”. As mentioned above, there is a Margin Call and Stop-out. So, when trading with leverage, you must always set a stop loss. The stop-out point is the maximum stop loss, closing the trade to the touch.
Some frequently asked questions
Can I change the leverage in an open order? It is not possible to change the leverage once an order has been successfully opened. You can decide to apply leverage and how much to use only when opening a new position. However, you can add capital to the order to change the maximum stop loss (Stop-out). Why can’t I see a profit from my leveraged trading? Leverage does not change the amount you invest but the level of trade and, therefore, the number of units in the trade. So the calculation of profits and losses on a leveraged trade is not based on the number of positions but on the number of units. Why can’t I use leverage?
If you can’t increase your trading leverage, here are some possible reasons:
- CFD trading is not allowed in your country of residence: all leveraged positions are traded as CFDs. CFDs are not allowed on specific asset classes under certain national laws and by regulatory bodies that manage certain eToro client accounts.
- Temporary limits are in place: if the market of the asset you want to trade is experiencing extreme volatility or low liquidity, eToro can disable the option to use leverage on new positions to protect its clients from significant losses.
- You do not have sufficient financial knowledge and trading experience: for legal reasons, CFD trading is allowed based on the information you provided in the “Experience and Goals” questionnaire when you opened your eToro account. Let’s say your answer shows that you don’t understand the risks of trading CFDs. eToro will prevent your account from opening.
Can I increase my trading leverage beyond the maximum limit? You can increase your maximum leverage if you are a professional account on eToro. An amateur account may require an upgrade to a Pro account if an investor meets specific regulatory criteria and has the necessary knowledge and experience to make their own investment decisions and assess the risks incurred.
It is important to note that professional accounts do not enjoy all the protections that amateurs have under CySEC, FCA or ASIC regulations.
Conclusion
Leverage has advantages and disadvantages. However, trading with it can have advantages. But it is essential to be aware of the risks it poses. Because profits can increase, but losses can also increase. That’s why you should use specific tools to limit the damage.
When assessing leverage risk, try implementing a risk management process or framework.
- Stop Loss: Use them to automatically close a trade when the loss reaches a certain amount.
- Take Profit Orders: Use take-profit. It helps to automatically close positions when they reach a specified value.
- Negative Balance Protection: In some cases, brokers like eToro will provide negative balance protection to protect against market conditions that cause equity to fall to 0. It means that they accept the loss on your behalf.
You use a combination of these tools to help you manage your level of risk.