How to trade Forex and CFD with a leverage higher than 1:30?


Since 1 August 2018, the European Securities and Markets Authority (ESMA) has applied legal regulations which oblige all forex and CFD brokers registered in the European Union and regulated by European financial market regulators to apply maximum leverage limits – 1:30 for the Forex market, 1:20 for the main indices, and only 1:2 for CFDs on cryptocurrencies. Many investors of the Forex market may ask themselves – can I trade Forex and CFDs with leverage higher than 1:30? The answer is ‘triple YES’.

What is leverage in Forex market?

In order for a trader to be able to decide for himself whether he needs a leverage higher than 1:30, one should ask himself a fundamental question – what is leverage in Forex and CFD really like and why it attracts so much attention? Leverage in Forex and CFD – or Forex leverage – is nothing other than the amount of margin that we need to hold on a brokerage account in order for the market position to be opened and maintained until its closing. Margin trading is based on the principle of holding only a part of the capital corresponding to the value of the market position.

For example, if you use a leverage of 1:2, it means that your margin is 50% of the value of the position you open – in other words, you only need to secure 50% of the amount you are investing in. If you wanted to open a position on EURUSD of 1.0 lot, i.e. EUR 100,000, you would need to have EUR 50,000 on your trading account. A leverage of 1:10 means that in order to open and maintain a position on the market, it is enough to have an amount corresponding to 10% of the value of the position on the account. This means that an EURUSD position of 1.0 lot would require only EUR 10 000 on the Forex trading account. The size of the position would be the same as in the first example so that the potential profit and loss from holding such a position would be exactly the same as with a leverage of 1:2. The only difference would be how much capital you would need to hold on your Forex trading account with a Forex broker and CFD.

Is higher Forex leverage more risky?

The question of whether a higher leverage in Forex and CFDs means a higher risk is a question which each trader has to answer on his own. In the general media, it is very common to find out that higher leverage automatically means higher risks. This is only partly true, because Forex leverage itself does not necessarily mean that our position is becoming riskier. Why? Because it is not the leverage that determines the risk that an investor bears on the market, but the size of the position he holds. It is true that the higher the leverage the investor has on his account, the greater the market position he is able to open. The relationship is easy to understand – a Forex leverage of 1:500 allows you to open a position five times bigger than a Forex leverage of 1:100. So, should Forex leverage be considered as the main reason for the losses of Forex traders? It seems that the most important reason is bad money, risk and position size management.

In order to better explain where the risk in Forex trading comes from, let’s take a look at the following examples. A Forex trader has two trading accounts with Forex brokers, each with a deposit of EUR 10,000 but different Forex leverage values, on the first one with a Forex leverage of 1:500, while on the second one with a Forex leverage of 1:100. At first glance, a less leveraged account is a less risky one. But is it that straightforward? No, it is a bit more complex. The investor’s risk exposure in a single transaction is determined by the size of the position, i.e. the market exposure of the investor. If a trader opens a position of 0.1 lot on his first account – the one where he works with a 1:500 Forex leverage – and a position of 0.2 lot on his second account – where the Forex leverage is ‘only’ 1:100 – then on which account trader bears the higher risk? The answer is unequivocal – on the second account because the position is twice as big as on the first account!

Twice the size (nominal value) of the position means that the size of one pip will be twice as big and will impact the investor’s account twice as strongly. If our example investor would open a position in EURUSD pair (EUR versus USD), for the size of 0.2 lot one pip would amount to 2 USD while for the position of 0.1 lot one pip would be equal to only 1 USD. What Forex leverage has an impact on then, if trading results of an investor are determined mostly by the size of his position and market exposure? Leverage only affects how much capital a trader needs on his account to open a position. In this example, a 0.1 lot position with a leverage of 1:500 would require a margin of only €20 (0.2% x €10,000) from the investor, while a 0.2 lot position with a leverage of 1:100 would require a larger margin of €200 (1% x €20,000).

Is it worth having access to high Forex leverage?

Since we have explained what a Forex leverage is, it is worth asking ourselves – is it worth having access to high Forex leverage? It all depends on the individual preferences of the investor, his degree of knowledge and market experience. If a trader is just beginning to trade Forex market and does not have enough knowledge and experience to manage the capital and risk skilfully, having too high Forex leverage on the account may result in significant losses or even his trading account being wiped out. The same situation may also occur in the case of a trader who does not skillfully control his emotions and tries to open a position using whole capital on his trading account. Having too much market power can turn against an investor and lead to significant losses.

So for whom does a high Forex leverage and CFD leverage make sense? For investors who take advantage of Forex leverage to maximize their return on investment (ROI). In the hands of a professional, leverage in Forex market can bring a return on invested capital of hundreds of percent, even when market volatility is not significant. This is due to the fact that the size of the market position held by such a trader – thanks to the appropriately high Forex leverage – directly affects the potential profit (and loss as well).

Forex with high leverage – Professional Client in Forex and CFD broker from the EU

Forex leverage cap of 1:30 imposed by ESMA’s regulations is so crucial for conscious Forex and CFD traders, that they have been considered changing their brokers to these who offer the highest available Forex leverage. One of the possibilities of investing in Forex with high leverage is trading with an EU broker as a professional client. Although EU brokers are subject to ESMA’s leverage regulations, these restrictions apply only to retail clients and not to professional clients. Thanks to that, professional clients can maintain their Forex leverage levels with the brokers they are currently trading with – for example 1:100 or 1:500.

How do I become a professional client with an EU broker? At least two of the three conditions for switching to professional have to be met. The first criterion concerns volume: a turnover of at least 20 lots must be made over the last 12 months, with five lots each quarter. For active Forex traders, this condition is fairly easy to fulfill. The second criterion refers to holding a portfolio of investments of significant size, i.e. the value of EUR 500,000 or its equivalent in other currencies. This criterion may be difficult to meet by a large proportion of investors, in particular, due to the fact that real estate should not be included in the valuation of the portfolio – it may include only financial instruments – shares, bonds, investment fund units, as well as bank deposits. The last criterion concerns experience in the financial sector – investors who have held a position requiring specialist knowledge in Forex and margin trading for at least 12 months will meet this requirement.

Highly leveraged Forex – Account with Australian Forex brokers

A reclassification as a professional client is a good way to secure yourself trading Forex with high leverage, despite ESMA’s regulations in place. However, individual criteria may be difficult to meet by some investors – for them, the easiest solution is to move their trading account to one of the Forex and CFD brokers from Australia. The most recommended and most frequently chosen by investors are two Forex and CFD brokers from Australia – IC Markets and IFM Trade. Both, IC Markets and IFM Trade are supervised by the Australian Securities and Investments Commission (ASIC). This fact is extremely important as ASIC regulations guarantee the safety of entrusted funds, compliance with regulations and applicable law.

The Forex leverage offered by IC Markets and IFM Trade is as high as 1:500, which is incomparably higher compared to what EU brokers offer to their clients – maximum Forex leverage is capped at 1:30 for retail clients. The offer of IC Markets and IFM Trade with regards to spreads is extremely competitive – spreads start from 0.0 pips on the main currency pairs. Low trading unit of 0.01 lot allows testing the quality of order execution on relatively small capital. Both, IC Markets and IFM Trade offer free demo accounts to test specification of trading accounts and the capabilities of the MetaTrader platform.

Highly leveraged Forex – Account with a Forex broker and CFDs from Switzerland

The third possibility for highly leveraged Forex trading in the EU is offered to investors by brokers registered in Switzerland and regulated by the Swiss Financial Market Supervisory Authority (FINMA). Although Switzerland is located in Europe, it is not part of the European Union and therefore has the autonomy to legislate on financial markets on its own. This means that brokers registered in Switzerland are not subject to ESMA regulations and may provide services on the Forex market with a leverage higher than 1:30.

An undoubted advantage of having an account with a Forex broker from Switzerland is the requirement for such an entity to hold a banking license. This means that when we deposit funds with this broker, we de facto deposit them with the bank providing services of access to Forex market. What does this mean for the investor? The funds deposited with Swiss Forex brokers – banks – are guaranteed up to CHF 100,000 in the event of the broker’s insolvency. This is significantly more than with EU brokers, who usually guarantee amounts of around €20,000.

Among Swiss Forex and CFD brokers, Dukascopy Bank deserves special recognition. This highly popular Forex broker offers excellent trading conditions, low commissions and, most importantly, Forex leverage up to 1:200. Among the financial instruments offered by the broker, you will find CFDs for currencies, commodities, indices and cryptos. Forex trading is available from two main trading platforms – JForex and MetaTrader. A free demo account will provide you with a great opportunity to check capabilities of both platforms and a robust offer of the broker as well.