Leverage on eToro gives you the ability to control large positions with a relatively small investment to increase the possible profits. However, this can also significantly increase the risks involved. That’s why it’s important that you exactly know what you’re getting into before doing leveraged trading on the platform.
Leverage magnifies both gains and losses. For instance, using 10x leverage means that a 1% market movement results in a 10% change in your position's value. While this can lead to substantial profits, it also means that losses can accumulate rapidly if the market moves against you.
When trading with leverage, maintaining a certain level of equity in your account is a must. If your account's equity falls below the required margin due to adverse market movements, eToro may issue a margin call. If you fail to meet this call, the platform may automatically close your positions to prevent further losses.
Holding leveraged positions overnight incurs additional costs known as overnight fees. These fees can accumulate over time, especially if positions are held for extended periods and this could erode your profits or increase the losses .
Leverage increases exposure to market volatility. Sudden market swings can lead to significant losses, particularly in highly volatile markets like cryptocurrencies or during major economic events. This kind of volatility can trigger stop-loss orders or margin calls unexpectedly.
eToro's leverage offerings are subject to regulatory restrictions, which vary by region and asset class. For example, in the European Union, the maximum leverage for major currency pairs is capped at 30:1, while for cryptocurrencies, it's limited to 2:1 . These limits aim to protect retail investors from excessive risk.
While eToro provides negative balance protection to prevent losing more than your deposited funds, it's still possible to lose your entire investment. This risk is heightened when using high leverage, as even small market movements can lead to substantial losses .
If you're planning to do leveraged trading, I recommend that you use tools like stop-loss and take-profit orders. This helps manage any possible losses and secures profits. Aside from that, I suggest that you start with lower leverage levels and gradually increase exposure as you gain experience and confidence in your trading strategy.
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