Detailed instructions on leveraged trading on eToro

BlogJune 26, 2022

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What is leverage? What is the leverage on eToro? Those are the great questions 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 stock is currently trading around $116.

  • 1x Leverage: If I use $116, I will get one share. Using 1x leverage also means using “no leverage.” I use 100% of my money to buy stocks. If AAPL goes bankrupt 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 shares. That means I can use $116 of my money. And the broker will lend me another $116. I can buy two shares (but only have to spend $116). Or if I want to buy one share, I will pay only half – 116/2 because the broker lends me the rest. If the company goes bankrupt and its stock goes 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 higher leverage levels (5x, 10x, 20x) are similar.

Leverage is a strategy by which an investor can multiply his purchasing power into assets. They open a trade with greater purchasing power with a smaller investment by borrowing money from the broker.

Leverage increases the potential return of an investment. But it can also be hazardous as it can increase the damage.

How does leverage work on eToro?

Any amount of leverage increases your investment with trading assets. It’s thanks to you borrowing money from eToro. Suppose you increase the leverage of any trade. Then that allows you to multiply your risk by the leverage ratio.

The coefficient (2x, 5x,10x) shows how much purchasing power you apply to your initial investment.

If you are considering increasing leverage, you must take into account:

  • Assets have different maximum leverage.
  • What is your risk tolerance? Because you use leverage can increase your potential loss, not just profit.
  • Leverage does not change the amount you invest. It changes 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 up to the minimum value.
  • Stop-out is the point at which an investor’s equity is Margin Called. But investors lack equity to replenish. The trading platform automatically closes open orders.

We explain the above terms for you to 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 for you 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

For each asset class on eToro, there is different maximum leverage.

eToro is a global trading platform. Therefore, the maximum leverage limits are determined by the competent authorities. And it changes according to the volatility of the asset.

And eToro can reduce leverage at any time because the right to lend or not belongs to them. Below are the maximum leverage levels available.

For all retail customers 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 equity indices.
  • x5 for share CFDs and ETFs.
  • x2 for Cryptocurrency CFDs.

For customers of eToro (Seychelles) Ltd:

  • x400 for major currency pairs (such as EUR/USD).
  • x100 for Gold and other commodities, and key stats.
  • x50 for non-major currency pairs.
  • x10 for non-major indices, share 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 fee.

Fees depend on many factors, but you should always know the costs before the trade. When placing an order, the overnight and weekly fees are displayed on the trade 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 “trade.”

Step 2: Next, you 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 dislike using leverage, you can choose “1x”.

Step 4: You set stop loss and take profit parameters.

Step 5: Click “open trade.”

As mentioned above, there is a Margin Call and Stop-out. So when you trade with leverage, you must always set a stop loss. The stop-out point is the maximum stop loss, closing the trade on touch.

Some frequently asked questions

Can I change leverage in an open order?

You cannot change the leverage once you have successfully opened an order. You can only decide to apply leverage and how much to use when you open 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 the trade and, therefore, the number of units in the trade. So the calculation of profit and loss on a leveraged trade is not based on the number of positions but the number of units.

Why can’t I use leverage?

If you cannot 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 permitted on specific asset classes under certain national laws and by the regulatory bodies that manage certain accounts of eToro clients.
  • Temporary limits are in place: If the market for the asset you want to trade is experiencing extreme volatility or low liquidity, eToro may disable the option to use leverage on new positions to protect its customers 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. Suppose your answer shows that you do not 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 the 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 benefits. But it’s 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 your leverage risk, try to implement a risk management process or framework.

  • Stop Loss: Use these to automatically close a trade when the loss reaches a certain amount.
  • Take Profit Orders: You use take-profit. It helps to close positions when they reach a specified value automatically.
  • Negative balance protection: In some cases, brokers like eToro will provide negative balance protection to guard against market conditions that cause equity to drop to 0. It means they accept the loss on your behalf.

You use a combination of these tools to allow you to manage your level of risk.

Read more: etoro

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