What is Leverage?
Leverage means controlling a large amount of money with a small deposit.
FCPO has 25:1 leverage, meaning:
- You deposit RM 4,000 (margin)
- You control RM 98,750 worth of palm oil
- Ratio: 98,750 ÷ 4,000 = 24.7:1 (approximately 25:1)
How 25:1 Leverage Works
How Leverage Multiplies Profits
When prices move in your favor, leverage amplifies gains.
- Entry: Buy at RM 3,900
- Exit: Sell at RM 4,000
- Move: +100 points
- Profit: 100 × RM 25 = RM 2,500
- Return on margin: 2,500 ÷ 4,000 = 62.5%!
Without leverage (if you bought actual palm oil worth RM 98,750), a 100-point move would still give you RM 2,500, but that's only 2.5% return on RM 98,750.
With leverage, the same RM 2,500 is a 62.5% return on your RM 4,000 margin!
How Leverage Multiplies Losses
The problem: leverage works BOTH ways.
- Entry: Buy at RM 3,900
- Exit: Forced out at RM 3,800
- Move: -100 points
- Loss: 100 × RM 25 = -RM 2,500
- Loss on margin: 2,500 ÷ 4,000 = -62.5%!
A 100-point move against you wipes out more than half your margin in one trade!
Price Movement Impact
Here's how different price moves affect your account:
| Price Move | P&L Amount | % of Margin |
|---|---|---|
| +50 points | +RM 1,250 | +31.25% |
| +100 points | +RM 2,500 | +62.5% |
| +200 points | +RM 5,000 | +125% (double!) |
| -50 points | -RM 1,250 | -31.25% |
| -100 points | -RM 2,500 | -62.5% |
| -160 points | -RM 4,000 | -100% (wiped out) |
A 160-point move against you = your entire RM 4,000 margin GONE.
FCPO regularly moves 50-150 points in a single day. On MPOB report days, it can move 200-300 points!
The Double-Edged Sword
Leverage is called a "double-edged sword" because:
- ✅ Sharp edge 1: Small wins become big profits
- ❌ Sharp edge 2: Small losses become big disasters
This is why FCPO is considered high-risk.
- FCPO leverage = 25:1 (control RM 98,750 with RM 4,000)
- Profits and losses are BOTH multiplied by 25x
- 100-point move = 62.5% gain or loss on margin
- Your entire margin can disappear in one bad day
- Leverage makes FCPO very risky for beginners
Next: Who Should Trade FCPO?
Now that you understand leverage's power and danger, the next article explains who actually trades FCPO and why.
- ✓ Part 1: What is FCPO?
- ✓ Part 2: Contract Specifications
- ✓ Part 3: Understanding Leverage (You are here)
- Next: Part 4: Who Trades FCPO?
- Part 5: FCPO Risks