Leverage, margin and why most retail CFD accounts lose money

Leveraged products let you control a position larger than the money you deposit. The same mechanism that magnifies gains also magnifies losses, and in fast markets those losses can arrive faster than you can respond.

Leverage and margin in plain terms

Margin is the deposit required to open a position. Leverage is the ratio between the position size and that deposit. At a ratio of 30:1, a 1% move against a fully margined position removes roughly 30% of the margin committed to it.

Margin calls and stop-outs

When your equity falls below a threshold, a provider may warn you (a margin call) and then close positions automatically (a stop-out). Thresholds differ by provider and jurisdiction and should be read in the terms, not assumed.

• Stop-outs may close your positions at a worse price than the threshold in volatile or gapping markets.
• Negative balance protection, where it applies, is entity- and client-category-specific.
• Weekend and overnight gaps can bypass stop-loss orders unless guaranteed stops are used and paid for.

Reading retail loss-rate warnings

Several regulators require providers to display the percentage of retail accounts that lose money. Treat these figures as a reminder of base rates, not as a measure of a provider’s quality. A lower figure can reflect client mix, product mix or the measurement period.

What these warnings do not tell you

• How large the typical loss was.
• Whether the provider is financially sound.
• Whether the figure covers the entity you would be onboarded to.

Questions before using leverage

1. What is the maximum amount I can afford to lose entirely?
2. What is the worst plausible overnight move for this instrument?
3. Do I understand how my position will be closed if margin runs out?
4. Is the entity I am using bound by leverage limits in my jurisdiction?

Nothing in this article is advice to trade or to avoid trading. It is intended to help you ask better questions of any provider and of your own plans.