What Does Leverage Mean?

Leverage in futures or forex trading usually means using margin or debt to partially finance a trade. Leverage on Nadex is different. It refers to the ability to get relatively large percentage returns on a small amount of risk capital

The conventional definition of leveraged trading involves borrowing some of the money you put up to control a financial contract. In futures trading, for example, one contract of corn futures is equal to 5,000 bushel. If corn is trading at $3 a bushel, that contract is worth $15,000. But for a deposit of less than $1000, you can get control of that contract. 

That deposit is called “margin” and margin trading is also referred to as leveraged trading. You only put up part of the money and your broker extends you credit for the rest.

Since a one-cent move in the price of corn equals 5,000 times one cent or $50, if the price of your corn contract goes up to $3.05, you profit $250. Technically, that’s a 25% ROI, which is what gives us the other use of the word “leverage.” For a relatively small outlay ($1000 of risk) you can make $250 or even $1000 or more.

Leverage can also mean risk (but not on Nadex)

However, for the same reasons, you could lose $250 or more if the price of corn drops just a few cents—something that happens almost every week. That’s what makes futures trading risky for the unprepared. Your leverage can be 1:15 or more. Forex trading also involves various degrees of leverage.

In the worst case, you can lose more in a trade than you have in your account. When that happens, you’ll get a margin call, which is basically a debt-collection call from your broker, who may give you 24 hours to deposit more money into your account or face consequences.

Leverage on Nadex: high ROI potential and risk limits you define

Nadex offers a different kind of leverage. For one thing, you can never get a margin call because you never trade using margin. All trades are fully collateralized up front.

But since Nadex contracts are relatively small you can still trade corn futures or any of 29 other markets for less cost per contract. One binary option always costs less than $100 to trade.

So where’s the leverage in Nadex trading? It’s often possible to buy or sell a Nadex binary for $20 or $30. If that binary expires in the money, you get the full payout of $100. That’s more than a 200% ROI, impressive for any trader.

But what if you want to trade in the thousands, not the tens or hundreds? Just trade multiple contracts. Fifty of those $20 out-of-the-money binaries will cost you $1000 plus $50 in fees. If they expire in the money, you collect $5,000 (minus another $50 in fees) for a profit of nearly 400%.

Few other types of trading offer daily opportunities to get that kind of real leverage with guaranteed risk limits that you set before you place the trade.

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