Trading 101: Dynamic leverage – what it is, how it works, and more!

ThinkMarkets has just launched its new set of account types. With it comes a powerful and advanced tool that can help improve your trading experience – Dynamic leverage.  

This comprehensive guide aims to help you understand the mechanics of dynamic leverage, what it is, and how it works, more importantly, how you can use dynamic leverage to maximise potential profit while minimising risk exposure.   

Understanding dynamic leverage: What it is 

Dynamic leverage is a mechanism that adjusts a trader's leverage based on a specific criterion determined by a broker. For example, ThinkMarkets' dynamic leverage feature relies on a trader's trade size. 

Unlike fixed leverage, where a trader's leverage ratio remains constant, dynamic leverage automatically changes.  

Mechanics of dynamic leverage: How it works 

If you trade with ThinkMarkets on an account with dynamic leverage, your leverage automatically changes depending on the size of your trade orders. Leverage and trade size, in this situation, shares an inverse relationship. As your position size increases, the leverage applied to a portion of your trade decreases. 

The process is automatic and recalculated in real time to guarantee that your risk exposure is reduced as you undertake bigger positions. This is a particularly nifty feature for risk mitigation and helping you avoid significant losses during volatile times. 

Dynamic leverage example: XAUUSD scenario   

Let's look at an example to visualise properly how dynamic leverage works.  

You decide to open a long position of 25 lots on XAUUSD, priced at 1,800. Below is the table of leverage tiers used by ThinkMarkets. 

According to the dynamic leverage tiers provided above:  

• For the first 10 lots, you get access to a leverage of 500:1 with a margin requirement of 0.2%.  
• The following 10 lots fall under the tier with 200:1 leverage and a 0.5% margin requirement.  
• The remaining 5 lots are at a leverage of 100:1 with a 1% margin requirement. 

Margin requirement calculation 
 

 
This means that for your 25-lot position on XAUUSD, the total margin required would be $21,600, given the price was 1,800.  

Advantages of dynamic leverage: Why it's good for traders  

While the notion of Dynamic leverage might sound intimidating, it offers several benefits that can elevate your trading:  

Risk management  

Dynamic leverage automatically adjusts to the size of your open positions, which helps manage risk more effectively. As you increase your position size, your leverage decreases, reducing the potential for significant losses relative to your account balance. This built-in risk control mechanism is especially valuable during times of increased market volatility, where price fluctuations can be more pronounced.   

Flexibility  

The ability to open positions with higher leverage allows you to maximise your trading potential even with limited capital. Higher leverage means less capital is required to open a position, giving you the opportunity to make significant profits from relatively small price movements. ThinkMarkets offers leverage as high as 2000:1 with the Mini account on select markets. Please note that higher leverage can increase profits but also increases the risk of losses.  

Capital preservation  

One of the primary goals of trading is to preserve your capital while generating returns. By scaling down leverage on larger trades, dynamic leverage prevents you from overexposing yourself to the market. This is crucial for long-term trading sustainability, as it helps ensure that you do not quickly deplete your trading capital, allowing you to continue trading even after a series of losses.  

How to integrate Dynamic leverage into your trading strategy  

Get a feel of dynamic leverage by starting small. Our Mini account allows traders up to 2000:1 leverage with only a required minimum deposit of $10. Take advantage of this higher leverage for potential greater returns.  

Make sure you closely monitor your positions to understand how your leverage changes as you scale your trade size. We recommend using take-profit and stop-loss orders to secure profits and manage risk effectively.  

As you adjust to having Dynamic leverage in your trading, familiarise yourself with the leverage tiers offered on your preferred market. Calculate your margin requirements correctly to avoid prematurely triggering a margin call.  

To sum up, Dynamic leverage offers traders a significant advantage and the flexibility to pursue aggressive strategies in small positions while preserving capital and managing risk as exposure grows. However, it's crucial to understand and anticipate the risks associated with trading.   

Trade with Dynamic leverage in a simulated trading environment risk-free by creating a Mini demo account.