CADET · Module F02: Your First Trading Decisions · About 25 minutes
Important: Leverage can magnify losses and lead to rapid account depletion. We explain it so you can recognise the risk, not to encourage using it.
Your mission today
Understand why trade size changes the amount gained or lost, recognise the main costs, and learn what leverage and margin mean in normal English.
1. One price move, very different money results
Imagine an imaginary product priced in dollars. It moves up by $2 per unit.
If you own one unit, that move is +$2 before costs. If you own ten units, the same movement is +$20. If you own one hundred units, it is +$200.
Now reverse the direction. A $2 fall means −$2, −$20 or −$200. The chart movement is identical. The difference is how many units you have exposed to it.
This is called position size. It is one of the most important ideas in the whole Journey because a person can correctly guess the direction and still take too much risk.
2. Trading products do not always use simple units
Some platforms show lots, contracts or another size setting instead of “one share.” A lot is a package size defined by that product or broker.
For example, a broker might define one standard gold-CFD lot as exposure to 100 troy ounces. Another product may have different rules. If gold moves $1 per ounce, that example contract's value changes by about $100 per full lot, before costs. This does not mean every product called Gold has that size.
Beginner rule: If you cannot explain what a lot represents in dollars, do not use a live trade. Look up the exact product specification first.
3. The costs people forget
When you buy at the ask and sell at the bid, their difference is the spread, which we met in F01.3.
Some brokers also charge a commission, which is a separate fee for placing trades. A trade kept open overnight may have financing costs (often labelled swap on certain forex or CFD platforms). The amounts and rules depend on the actual product.
A tiny gain on the chart may disappear once those costs are included. A platform may also fill your order at a worse price when the market moves fast; the difference is commonly called slippage.
You do not need an advanced spreadsheet today. Just remember that gross result means before costs, while net result means after costs.
3A. Count the spread in money
You already know that Bid is what you receive to sell and Ask is what you pay to buy. The spread is Ask minus Bid.
Imagine Bid $20.00 and Ask $20.20: spread = $0.20 per unit. If you bought and immediately closed, before other fees the gap would cost: 1 unit = $0.20, 5 units = $1.00, 20 units = $4.00.
This is a difference between buying and selling prices. Do not count it twice as though the broker charged another separate $0.20 fee just for placing the same transaction.
3B. Spreads can change
The spread is not always fixed. The market may become quieter or busier, and the two quoted prices can move apart.
For our made-up product, a narrow 2-cent spread costs $0.20 across 10 units. A wide 40-cent spread costs $4.00 across the same 10 units for an immediate round trip, before any other fees.
This is why beginners must check the actual quotes rather than assume trading costs are always tiny.
3C. Costs beyond the spread
Some brokers charge a separate commission, and holding certain leveraged positions overnight can create a financing or swap charge. Also, your order might fill at a different price than the one you first saw. That is called slippage.
For a BUY opened at Ask $20.20, the later Bid must reach at least $20.20 just to break even before any other fees. If commission applies, the Bid generally needs to rise higher to cover it.
Check the whole cost: spread, any commission, any overnight financing, and how execution might differ. Do this in a demo account before trading real funds.
4. Borrowed exposure: leverage
Imagine you have $100 but a product lets you control $1,000 worth of price exposure. That is an example of 10-to-1 leverage.
If the underlying price moves 5% against the entire $1,000 position, that is about $50 lost before costs. Relative to your $100, that is a 50% hit. A 5% move may sound small, but leverage has made its effect on your money much larger.
Leverage does not change your ability to predict prices. It simply changes how strongly the movement affects your account.
5. What is margin?
Margin is money the broker requires you to provide or keep available as security for certain leveraged trades. Margin is not the most you can lose. If prices move against you, you can lose additional funds, face forced closure or even owe more depending on the product, account terms and jurisdiction.
When a platform says you have “enough margin” to open a large trade, it is not saying the trade is safe. Can I open it? and Can I afford the loss? are completely different questions.
Practice mission
Use an imaginary price fall of $3 per unit:
- 1 unit: −$3.
- 5 units: −$15.
- 20 units: −$60.
Next, answer aloud: if a broker lets you borrow more exposure, does that make it easier to predict the market? No.
Finally, write these three words on a page: size, spread, leverage. Explain each in a sentence a 12-year-old could understand.
Before your next lesson
You should understand that the number of units changes your dollar exposure, even when the price chart looks the same.
Coming next: How to describe whether a price is moving up, down or sideways, without using complicated indicators.
