Understanding Leverage and Margin
Master the concepts of leverage and margin requirements in Event Contracts CFD trading.
What is Leverage?
Leverage allows you to control a larger position size than your account balance would normally permit. In Event Contracts CFD trading, leverage amplifies both potential profits and potential losses, making it a powerful but risky tool that requires careful management.
For example, with 10:1 leverage, you can control a $10,000 position with just $1,000 of your own capital. This means a 5% move in your favor generates a 50% return on your invested capital, but a 5% move against you results in a 50% loss.
How Leverage Works in Event Contracts
Leverage Ratios
EXDGE offers various leverage ratios depending on the contract type and your account level:
Most economic and political event contracts
Higher volatility requires lower leverage limits
Uncertain outcomes with extreme volatility
Understanding Margin Requirements
Margin is the amount of capital required to open and maintain a leveraged position. There are several types of margin you need to understand:
Initial Margin
The minimum amount required to open a position. For a $10,000 position with 10:1 leverage, your initial margin requirement would be $1,000 (10% of the position size).
Maintenance Margin
The minimum equity level required to keep a position open. If your account equity falls below this level, you'll receive a margin call and may face position liquidation.
Available Margin
The amount of capital available for opening new positions. This is your account equity minus the margin already allocated to open positions.
Margin Level
The ratio of your equity to used margin, expressed as a percentage. A margin level below 100% indicates you're at risk of liquidation.
Margin Call and Liquidation
Margin Call: When your margin level falls below the maintenance requirement (typically 50%), you'll receive a margin call notification. This is a warning that you need to either deposit additional funds or close positions to avoid liquidation.
Automatic Liquidation: If your margin level continues to decline and reaches the liquidation threshold (typically 20-30%), the platform will automatically close your positions to prevent your account from going negative. Positions are closed starting with the most unprofitable ones.
Prevention: Always maintain adequate margin buffer. We recommend keeping your margin level above 200% to provide cushion for market volatility and avoid forced liquidations.
Calculating Position Size with Leverage
Proper position sizing is crucial when using leverage. Here's a step-by-step approach:
Example Calculation
Account Balance:
$10,000
Risk Per Trade (2%):
$200
Contract Price:
65 points
Maximum Loss (if settles at 0):
65 points per contract
Position Size:
$200 ÷ $65 = 3 contracts
Best Practices for Using Leverage
Start Conservative
Begin with lower leverage ratios (2:1 or 3:1) until you're comfortable with how leverage affects your positions. Many experienced traders use less leverage than available.
Monitor Margin Levels
Check your margin level regularly, especially during volatile market conditions. Set up alerts to notify you when margin levels approach critical thresholds.
Account for Volatility
Higher volatility events require lower leverage. Adjust your leverage based on the expected price movement and uncertainty of the event outcome.
Keep Reserve Capital
Don't use all available margin. Maintain at least 30-50% of your account as reserve capital to handle unexpected market moves and avoid margin calls.
Use Stop Losses
While Event Contracts have defined risk, you can still close positions early to limit losses. Set mental or actual stop loss levels based on your risk tolerance.
Common Leverage Mistakes to Avoid
Over-Leveraging
Using maximum available leverage on every trade. This leaves no room for error and can quickly wipe out your account with a few losing trades.
Ignoring Margin Calls
Failing to act on margin call warnings. Always respond promptly by either adding funds or closing positions to avoid forced liquidation at unfavorable prices.
Revenge Trading
Increasing leverage after losses to "make back" lost capital quickly. This emotional response typically leads to even larger losses and account destruction.
Neglecting Correlation
Opening multiple leveraged positions on correlated events. This concentrates risk and can lead to simultaneous losses across all positions.