Can leverage cause my account go negative?

Because AvaTrade uses a 50% margin requirement and the use of the margin call your risk of excessive trading losses that exceed the total balance of your account is minimized, but it is not eliminated completely. During a period of extreme volatility, it is possible that a position could move so rapidly against you that it is not possible to liquidate a losing position in time to keep your account balance from going negative. To avoid this, we strongly recommend that you manage your use of leverage wisely.

What is the difference between leverage and margin?

While leverage and margin are closely interconnected, they are not the same thing. Both describe borrowing in order to trade in the financial markets, however leverage refers to the act of taking on debt, while margin is the actual money or debt that the trader has taken on to invest in financial markets. The leverage ratio is a representation of the position value in relation to the investment amount required, (for instance, 100:1) while margin is the actual amount held by the broker to create the leverage, which is expressed as a percentage of the total position. For example, with 100:1 leverage you can control $100 of an asset with only $1 (equal to 1%) in margin.

Are there any disadvantages of leverage?

Leverage is a very complex financial tool and should be respected as such. While it sounds fantastic in theory, the reality can be quite different once traders come to realize that leverage doesn’t only magnify gains, but it also magnifies losses. Any trade using leverage that moves against the trader is going to create a loss that is much larger than it would have been without the use of leverage. This is why caution is recommended until more experience with leverage is gained. This can lead to a longer and more prosperous trading career.

Guide to Leverage

Trading for Beginners

Beginner • 11 min

If you want to open a leveraged trading account, simply click on the button below. If you want to learn more about leveraged trading, margin requirements, margin call conditions, etc. – read the full article.

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What is Leverage in Trading?
What is Margin Trading?
Pros and Cons of Leverage
Example of Leverage Trading
Margin Call – How it Works
Leverage Trading with AvaTrade

What is Leverage in Trading?

Leveraged trading is a powerful tool for CFD traders. It can help investors to maximise returns on even small price changes, to grow their capital exponentially, and increase their exposure to their desired markets. But it is worth noting that leverage can work for or against you. While you stand to earn magnified profits when asset prices go your way, you also suffer amplified losses when prices move against you. When you are trading with leverage, you put a ‘small amount’ down, but you get the chance to control a much larger trade position in the market. The small amount is what is referred to as ‘margin’. The amount of leverage a broker offers depends on the regulatory conditions that it complies with, in any/all of the jurisdictions it is allowed to offer trading services in.

With leveraged trading, the trader need only invest a certain percentage of the whole position. This can change depending on how much leverage the broker offers, how much leverage the trader would like to implement, and it also relies heavily on the regulatory authorities which are tasked with overseeing the online trading industry in that jurisdiction.

Also, traders use leverage depending on their level of experience, investing goals, their appetite for risk, as well as the underlying market they are trading. In most cases, it is professional traders that tend to use leverage more aggressively, whereas new and less experienced traders are generally advised to use leverage with caution. Also, conservative traders will tend to use the minimum level of leverage possible, whereas traders with a high appetite for risk can use leverage flexibly.

The type of market traded can also dictate the amount of leverage traders can use. Volatile markets, such as Gold and Bitcoin, should be traded with minimal leverage, whereas less volatile assets that do not post wide price fluctuations, such as the EURCHF pair, can be traded with higher leverage levels.

Expert Insights and Historical Context

Warren Buffett, one of the world’s most respected investors, famously remarked:

“Leverage is the only way a smart person can go broke—and I’ve seen more than a few.”
— Warren Buffett
(Source: The Essays of Warren Buffett: Lessons for Corporate America, by Lawrence A. Cunningham)

This powerful statement underscores the dual nature of leverage. It can amplify your profits but also magnify losses.

History offers stark reminders of this risk. Events like the 2015 Swiss Franc shock show how overleveraged positions can unravel in seconds. For CFD traders, the lesson is clear: success requires disciplined risk management and a cautious approach to leverage.

Common Mistakes in Leverage Trading

Leverage is a powerful tool, but it demands respect. Many new traders dive in with excitement, but they lack the experience to use it safely. Here are some common missteps:

Overleveraging: Chasing high returns by using maximum margin leaves no buffer for adverse moves. You do not have to use the maximum available leverage offered by your broker.
Ignoring Volatility: Markets are unpredictable and amplified price swings can quickly turn small losses into significant ones, especially for leveraged positions.
Skipping Stop-Loss Orders: Without a clear exit strategy, small setbacks can spiral into large drawdowns. Stop loss orders cap your maximum risk, and they should never be skipped.
Misunderstanding CFD Pricing: Misjudging contract costs or overnight fees can lead to costly errors. Leveraged positions also attract relatively higher trading costs, undermining your overall profits.

How to Mitigate These Risks

Trading with leverage doesn’t have to be risky if you adopt these practices:

Start Small: Use conservative leverage ratios until you’ve built skill, confidence, and experience.
Set Stop-Losses: A strict stop-loss strategy helps protect against big losses that arise from unexpected market movements.
Diversify Your Portfolio: Spread investments across assets to limit exposure to any single asset or market.
Stay Informed: Follow market updates, economic reports, and geopolitical news to avoid surprises.
Review Regularly: Markets change, and so should your leverage approach. Align it with your risk tolerance and current conditions.

Financial Regulators on Leverage

Regulators worldwide offer insights into the use of leverage and its risks.

Europe (ESMA): Research highlights how leverage caps can improve outcomes for retail traders.
United States (CFTC): Regular updates guide traders on safe practices.
Academic Studies: Research illustrates how leverage impacts market reactions and trader behaviour.

Trends in Leveraged Trading

Retail traders now have more access to leverage than ever before. However, regulators are stepping in to limit overexposure and protect consumers.

This shift is reshaping the market. Managing leverage effectively isn’t just an option, it’s becoming a necessity for modern traders.

Regulatory Information by Region

Leverage limits vary across jurisdictions:

Europe (ESMA): Caps at 1:30 for major forex pairs, with lower limits for volatile assets.
Australia (ASIC): Similar restrictions, scaling leverage down based on asset risk.
UK (FCA): Limits aim to reduce losses for retail traders.
Asia (MAS, FSA): Rules reflect local conditions and global standards.
S. (CFTC/NFA): Strict limits, such as 1:50 for major currency pairs, promote a conservative approach.

Example of Leverage Trading – Retail Clients

Let’s look at another example, this time with Gold. The price of one Troy ounce of Gold is $1,327. The trader believes the price is going rise and wishes to open a large buying position for 10 units. The full price for this position will be $13,270, which is not only a large amount to risk, but many traders do not possess such amounts. With a 20:1 leverage offered by AvaTrade, or a 5.00% margin, the amount will decrease substantially. Meaning that for every $20 of worth in the position, the trader will need to invest $1 out of his account, which comes to $663.5 only.

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Margin Call – How it Works

In order to employ leverage, a trader must have sufficient funds in his account to cover possible losses. Each broker has different requirements. AvaTrade requires a Retail Trader to possess Equity of at least 50% of his Used Margin for MetaTrader 4 and AvaOptions accounts.

Going back to the example above, the position’s original value is $13,270; for both MetaTrader 4 and FX options trading accounts. With leverage, the trader invests $663.5 of his capital, and if he has 50% of this used margin in equity, i.e. $331.75, his positions will be kept opened.

If, however, the trader has losses and his Equity drops below 50% of used margin on MetaTrader 4 and AvaOptions accounts, the broker will shut down the client’s position(s), in a “Margin Call”.

On AvaOptions all the client’s positions will be closed, while MetaTrader 4 will shut down the largest losing position first, and will continue to close positions until the equity level returns above 50% of the used margin.

Example of Leverage Trading – Pro/Non EU clients

In this example, we’ll take the price of one Troy ounce of Gold at $1,327. The trader believes the price is going to rise and wishes to open a large buying position for 10 units. The full price for this position would be $13,270, which is not only a large amount to risk, but many traders may not possess such amounts. Using the 200:1 leverage offered by AvaTrade, or a 0.50% margin, the amount will decrease substantially. Meaning that for every $200 of worth in the position, the trader will need to invest $1 out of his account, which comes to just $66.35.

Margin Call – Pro/Non EU clients

In order to employ leverage, a trader needs to have sufficient funds in his account to cover possible losses. Each broker has different requirements, and AvaTrade requires a Pro/Non – EU Trader to possess Equity of at least 10% of his Used Margin for MetaTrader 4 and AvaOptions accounts.

Going back to the example above, the position’s original value is $13,270 for both MetaTrader 4 and FX options trading accounts.

With leverage the trader invests $66.35 of his capital, and if he has 10% of this used margin in equity, i.e. $6.64, his positions will be kept opened.

If, however, the trader has losses and his Equity drops below 10% of used margin on MetaTrader 4 and AvaOptions accounts, the broker will shut down the client’s positions.

On AvaOptions all the client’s positions will be closed simultaneously, while MetaTrader 4 will shut down the largest losing position first, and will continue to close positions until the equity level returns above 10% of the used margin.

Important Reminder

Leverage trading carries significant risk. Losses can exceed your deposited capital if the market moves against you. Always trade with funds you can afford to lose and consider seeking professional advice before using high leverage.

Leverage Trading with AvaTrade

AvaTrade offers many instruments, and each has a different leverage available which can also change based on the trading platform you choose to work with. It is important to make sure you know the available leverage before you start trading.

In order to avoid a margin call always make sure you have enough equity in your account’s balance so you can continue your trades undisturbed.

Finally, it’s worth trying out our AvaProtect feature. It is a risk management tool that protects your open positionsif you set it up before you open the trade.

It lasts as long as you want it to, and if your trade is losing upon expiry, you will get all the money back into your account, minus the fee you paid for the AvaProtect™ facility.

Leverage main FAQs

Can leverage cause my account go negative?

Because AvaTrade uses a 50% margin requirement and the use of the margin call your risk of excessive trading losses that exceed the total balance of your account is minimized, but it is not eliminated completely. During a period of extreme volatility, it is possible that a position could move so rapidly against you that it is not possible to liquidate a losing position in time to keep your account balance from going negative. To avoid this, we strongly recommend that you manage your use of leverage wisely.
What is the difference between leverage and margin?

While leverage and margin are closely interconnected, they are not the same thing. Both describe borrowing in order to trade in the financial markets, however leverage refers to the act of taking on debt, while margin is the actual money or debt that the trader has taken on to invest in financial markets. The leverage ratio is a representation of the position value in relation to the investment amount required, (for instance, 100:1) while margin is the actual amount held by the broker to create the leverage, which is expressed as a percentage of the total position. For example, with 100:1 leverage you can control $100 of an asset with only $1 (equal to 1%) in margin.
Are there any disadvantages of leverage?

Leverage is a very complex financial tool and should be respected as such. While it sounds fantastic in theory, the reality can be quite different once traders come to realize that leverage doesn’t only magnify gains, but it also magnifies losses. Any trade using leverage that moves against the trader is going to create a loss that is much larger than it would have been without the use of leverage. This is why caution is recommended until more experience with leverage is gained. This can lead to a longer and more prosperous trading career.