Trading with leverage on XM allows you to gain greater exposure to financial markets while controlling a larger position with a smaller amount of capital. However, leverage also magnifies risk, so it’s important to understand the risks and determine how much is appropriate for your trading strategy and risk tolerance. This comprehensive guide examines XM leverage and margin trading to help you decide how much risk to take on.
Overview of Leverage and Margin Trading on XM
XM offers leveraged trading on forex, metals, energies, stock indices, commodities, shares, and cryptocurrencies through its XM Ultra-Low account. Leverage allows traders to open larger positions with less capital by borrowing funds from their broker. For example, with a leverage of 1:100, you could control a $10,000 position with just $100 of equity in your account.
XM’s maximum leverage ratios by instrument class include:
- Forex: Up to 1:888
- Indices, metals, energies: Up to 1:500
- Commodities: Up to 1:100
- Shares: Up to 1:5
- Cryptocurrencies: Up to 1:2
Margin refers to the amount of funds you must keep in your account as collateral for the size of your leveraged position. With leverage, margin requirements are lower since you are only required to put up a fraction of the total position value.
The main benefits of trading with leverage on XM include:
- Requires less capital – Allows access to bigger positions and potentially larger profits with a small account balance.
- Enhances buying power – Control more units of a financial instrument without needing to fund the full cost.
- Magnifies potential gains – A 2% return on a 2:1 leveraged position equates to a 4% gain.
However, leverage and margin trading carry considerable risks that must be fully understood and actively managed.
Key Risks of Leverage and Margin Trading
While leverage creates the opportunity for amplified gains, it inevitably magnifies losses as well. The higher the leverage, the greater the risk involved.
Here are the main risks to evaluate with XM leverage:
1. Margin Calls
If your account equity falls below the margin requirement to maintain your open positions, you will receive a margin call from XM. This requires you to either deposit more funds or close out positions to restore your equity. With high leverage, margin calls happen quickly, leading to forced liquidations.
2. Forced Liquidations
If you fail to meet a margin call, XM has the right to forcibly close out your positions without warning to bring your equity back above the maintenance margin. This could lead to losses beyond what you might exit at yourself.
3. Account Wipes
In an extreme market move or “black swan” event, it’s possible for abrupt, sharp price swings to lead to total losses beyond your account balance. With excessively high leverage, you risk your balance falling to zero.
4. Greater Losses
With XM’s high leverage up to 1:888 on forex and 1:500 on indices, losses are magnified just as much as any potential gains. This amplifies the impact of trading mistakes and market events.
5. Increased Costs
XM passes on financing costs for leveraged position holding long or short. These costs increase with higher leverage and balances.
6. Complex Risk Management
Higher leverage requires more advanced risk management to avoid forced liquidations and margin calls. This includes adjusting stop losses, monitoring equity, and closing positions.
7. Volatility Risk
Leverage can make it more difficult to withstand market volatility. Spikes in volatility increase margin requirements and account risk.
Determining Appropriate Leverage Based on Risk Tolerance
With these risks in mind, how do you determine an appropriate level of leverage aligned with your risk tolerance on XM? Consider these guidelines:
- Conservative – 1:20 leverage or less is considered conservative, with lower chance of margin calls and forced liquidations. Recommended for new traders.
- Moderate – 1:50 leverage balances risk and reward for most experienced traders under stable market conditions.
- Aggressive – Leverage of 1:100 or higher leaves little room for error and is best reserved for expert traders comfortable with risk.
The optimal leverage also depends on:
- Instrument – Lower leverage for higher-risk assets like cryptocurrencies and stocks. Higher leverage usable for stable forex pairs.
- Account Size – Larger accounts can justify higher leverage; smaller balances require lower leverage.
- Strategy – Short term strategies demand lower leverage due to volatility risk.
- Market Conditions – Reduce leverage in turbulent markets with higher volatility.
How Much Leverage is XM Currently Offering?
Here is a breakdown of the maximum leverage XM offers across each asset class as of October 2022:
| Asset Class | XM Maximum Leverage |
|---|---|
| Forex (Major/Minor Pairs) | Up to 1:888 |
| Forex (Exotic Pairs) | Up to 1:500 |
| Indices | Up to 1:500 |
| Metals | Up to 1:500 |
| Energies | Up to 1:500 |
| Commodities | Up to 1:100 |
| Shares | Up to 1:5 |
| Cryptocurrencies | Up to 1:2 |
These leverage amounts are significantly higher than margin requirements on comparable platforms:
| Broker | Typical Max Leverage by Asset Class |
|---|---|
| XM | Up to 1:888 on Forex |
| AvaTrade | 1:30 on Forex |
| CMC Markets | 1:500 on Forex, 1:100 on Commodities |
| IG | 1:200 on Forex |
| Pepperstone | 1:500 on Forex |
XM provides access to forex leverage ratios exceeding common broker offerings. However, these high limits enable substantial risk that beginner traders may not fully appreciate.
XM Leverage FAQs
Q: What is the max leverage on XM?
A: XM offers industry-leading leverage up to 1:888 on major forex pairs. Other instruments have lower caps, like 1:500 for indices/metals, 1:100 on commodities, and 1:2 on crypto.
Q: How much leverage should I use on XM?
A: Leverage depends on your risk tolerance, account size, strategy, and markets. Conservative traders use 1:20 or less. Moderate leverage is 1:50. Aggressive traders utilize 1:100+. Reduce leverage in volatile markets.
Q: What is the margin requirement for 1:100 leverage on XM?
A: With 1:100 leverage, the margin requirement is generally 1% of the position size. So for a $10,000 position, the margin needed would be $100. Margin allows controlling larger positions with less capital.
Q: Can I change leverage on an open trade on XM?
A: XM allows you to modify your leverage on existing positions through a feature called Margin+. You can increase or decrease leverage on open trades to alter exposure.
Q: What happens if I don’t meet the margin requirement on XM?
A: You will receive a margin call from XM requiring you to deposit funds or close positions to restore your equity. If you fail to meet the call, XM can forcibly liquidate your positions.
Q: Can I lose more than my account balance when trading with leverage?
A: Yes, it is possible to lose more than your account balance, leading to a negative balance. This typically only occurs with excessively high leverage on large positions that experience a sharp adverse move.
5 Tips for Managing Risk with XM Leverage
- Start small – Build up your leverage ratio as you gain experience, beginning with 1:20 or less when starting out.
- Use stop losses – Employ stop losses on all trades at a level that accounts for leverage and prevents excessive risk.
- Monitor margin usage – Frequently check your account equity vs margin requirement to avoid potential calls.
- Watch volatility – Reduce leverage when volatility spikes as markets become riskier.
- Limit position size – Even with high leverage, position size should be reasonable for your account balance.
Conclusion
XM provides traders access to high leverage up to 1:888, enabling substantial risk and reward. While leverage magnifies potential profits, it also amplifies losses and the impact of market volatility and trading errors. Carefully determine your appropriate leverage ratio in line with your risk tolerance and market conditions to avoid excessive risk and forced liquidations. Use stop losses, monitor margin usage, and implement proper risk controls when trading with leverage on XM.
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