In general terms, leverage refers to the ability to use
something to your advantage. Often, it is something small that lets you control
something big.
In forex trading, leverage simply means you can control
large amounts of assets in the market with just a small amount of capital. For stock traders, this is trading on margin.
What is
Leverage in Trading?
When you use leverage in forex trading, you don’t have to
pay any interest on the margin you used. In addition, you can use leverage no
matter what your trading style is. Day traders, swing traders, momentum
traders, scalpers, position traders, and other traders can use leverage.
All you need is an
account and a broker that offers margin.
Obviously, the biggest advantage of using leverage is that
you can earn disproportionately huge amounts with a small capital. You still have
to win the trade, though.
Some Tips when Using Leverage
Leverage is a very powerful
instrument you can use when you trade in the financial markets. However, it may
also be very risky for your trades. This is because using leverage also
magnifies the possible losses you may get.
Therefore, proper and streamlined risk management is very necessary.
Efficient risk management helps prevent disastrous leverage from
wiping out your account in one sweep. The following tips will help you use
leverage more properly to your advantage.
Risk management is key
As we have mentioned, proper risk management is the key to a
safe and profitable leverage trading. When you start trading with leverage, you
must be aware of the risks that you will encounter along the way.
You can never remove risks from the equation. One way or another,
risks are always present in your trades. You cannot get rid of them completely,
but you can nonetheless control how much risk you’re willing to take.
Stop loss orders are a must
Stop loss orders are very important if you really want to
control the risks you are taking. These orders tell your trades when to stop,
minimizing the losses you will incur in a trade. In other words, you know the
maximum amount of losses you will have in a particular trade.
Stop loss orders serve like insurance for you. When you
trade, you should place your stop loss orders strategically, giving enough room
for retracements or volatility. Do not place it too far below the starting point,
or it will be useless.
Don’t be too aggressive
You need to be ridiculously lucky if you want to be a
millionaire overnight via trading. While you can make a lot of money by trading,
it will still take time. So you need to be very patient and gauge the market
first before going for the kill.
Do not revenge trade to get even with a position you have
lost. Do not add to a losing position. These are very bad habits when you are using
leverage.
Remember that the market never stops moving. It never runs
out of tricks up its sleeves. There are literally thousands of potential trades
every day and all you have to do is to wait for the perfect opportunity to
present itself.
Conclusion
Leverage is a double-edged blade and you can
only wield it if you know how powerful it is and how it can both make and break
your trading career. The above mentioned tips are just primers on how
effectively use leverage. You must keep developing different strategies that
will help you utilize its power more effectively to become a more profitable
trader.
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