Let’s say you want to trade using a \$5,000 deposit (or the equivalent in GBP) in gold CFDs, a popular commodity, using leverage. For gold, the maximum leverage permitted is 20:1. This means that you can now open trades with a face value of up to \$100,000. Why? Because…

5,000 (deposit) x 20 (leverage) = 100,000 (face value or trading power).

For the sake of this example, let’s say a single CFD on gold is worth \$1,000. You believe the price will increase and so decide to open a Buy deal on gold, buying 100 CFDs.

100 x 1,000 = \$100,000

A few hours later, you go to your trading account and see that you were correct: the price of gold CFDs has risen to \$1,020.

Well, that’s great news for you because your 100 gold CFDs are now worth \$102,000. Why? Because…

100 x 1,020 = \$102,000

You decide it’s time to close your gold deal.

Your total pretend profit from this pretend deal is:

102,000 – 100,000 = \$2,000, or a \$2,000 profit on a \$5,000 deposit.

Similarly, if gold price falls from \$1,000 to \$980, your pretend loss on the same pretend deal will be \$2000.