avatarEsteban Thilliez

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Abstract

   </a>
    </div><h2 id="b487">Pros of Leveraged Trading</h2><p id="f0f8">First, leveraged trading allows you to amplify your profits by controlling larger positions than your available capital would permit. With leverage, your potential gains can be significantly increased if the market moves in your favor. This is especially beneficial in volatile markets or when trading highly liquid assets.</p><p id="b1ce">The ability to open larger positions comes with another advantage: you can take advantage of opportunities that would otherwise be out of reach. Leveraged trading opens doors to markets and assets that may have high capital requirements, enabling you to diversify your investment portfolio.</p><p id="c240">Then, leveraged trading also allows you to spread your capital while keeping your risk managed as you want. Indeed, since it’s as if you have more capital available, rather than putting it all into one position in the hope of making more gains, you can instead open several different positions in reasonable quantities. This is the approach I recommend.</p><p id="83d0">Finally, leveraged trading provides the opportunity to profit from falling prices through short-selling. Indeed, because you can borrow assets with leveraged trading, you can then sell them at the current market price, and aim to buy them back at a lower price to make some profit.</p><h2 id="de3d">Cons of Leveraged Trading</h2><p id="3487">First, leveraged trading exposes you to increased risk, as any losses incurred are magnified. If the market moves against your position, you may face substantial losses that exceed your initial investment. It’s essential to be aware of the potential for significant losses and have a clear risk management strategy in place.</p><p id="2ff4">When trading on margin, you must maintain a certain level of equity in your account. If the value of your positions declines significantly, you may receive a margin call from your broker, requiring you to deposit additional funds or close out positions. Failure to meet margin requirements can result in the liquidation of your positions, potentially leading to significant losses.</p><p id="3e24">Also, there can be psychological challenges involved with leveraged trading, particularly in volatile markets. The amplified gains and losses associated with leverage can induce higher levels of stress and anxiety. It’s important to avoid making impulsive decisions, especially when trading with leverage. You have to maintain discipline.</p><p id="7701">Finally, you may be prone to additional trading costs when trading on margin. Indeed, when you trade on margin, you are essentially borrowing funds from your broker. This borrowing typically comes with interest charges. These interest costs can eat into your profits and increase your overall trading expenses. In addition to interest charges, brokers often charge extra for providing leverage, executing trades, or managing margin accounts.</p><h2 id="e7bf">How to Correctly Trade With Leverage</h2><p id="ff9b">I’ve already explained this in another article, but I’ll repeat it here in case you missed it.</p><p id="ea9b">Before trading on margin, you have to set specific risk management rules. Let’s say for example you don’t want to risk more than 1% of your account for each trade.</p><p id="fadf">We’ll imagine you want to buy a fictive asset called “X”. Let’s say X’s price is currently $20 000. You have a $1 000 balance. You think X’s price

Options

will increase soon, so you’ll buy X. You also think X’s price can’t go lower than 19 900.</p><p id="6e94">So you will buy X at 20 000 with a stop loss at 19 900. With your current balance, you can buy 0.05 X without margin. If your stop loss gets hit, you lose 5, or 0.5% of your account. But according to your risk management rules, you can risk up to 1% of your account for each trade.</p><p id="5eb8">So instead of buying 0.05 X, you can buy 0.1 X on margin. This way your risk will be 1%. Let’s say the margin requirement is 10%. You have to spend 200 as collateral to open a 2 000 worth position.</p><p id="62d1">By doing this, you still have a 800 free margin, so you can, for example, open another 2 000 position using $200 to buy a fictive Y asset, and spread your exposure over many assets, while sticking to your risk management rules.</p><p id="7a52">To summarize, you have to see margin trading and leverage as tools to stick to your risk management rules, not as a magic way to x100 your profits, or else you’ll blow your account faster than light.</p><h2 id="6121">Final Note</h2><p id="8cc7">Leveraged trading is a powerful tool that comes with many pros, but there are also some drawbacks if you don’t use it correctly.</p><p id="05f6">In this article, I just talked about the pros and cons of margin trading without explaining it in detail, so if you want to really understand it you should check the story I made about it: <a href="https://wire.insiderfinance.io/margin-trading-explained-a44a1e0521e8">Margin Trading Explained</a></p><p id="b1f9"><i>To explore more of my trading stories, click <a href="https://readmedium.com/improve-your-trading-7fdd3e5428a5">here</a>!</i></p><p id="e697"><i>If you liked the story, don’t forget to clap and maybe follow me if you want to explore more of my content :)</i></p><p id="7f8d"><i>You can also subscribe to me via email to be notified every time I publish a new story, just click <a href="https://medium.com/subscribe/@estebanthi">here</a>!</i></p><p id="8079"><i>If you’re not subscribed to Medium yet and wish to support me or get access to all my stories, you can use my link:</i></p><div id="23b1" class="link-block"> <a href="https://medium.com/@estebanthi/membership"> <div> <div> <h2>Join Medium with my referral link — Esteban Thilliez</h2> <div><h3>Read every story from Esteban Thilliez (and thousands of other writers on Medium). Your membership fee directly…</h3></div> <div><p>medium.com</p></div> </div> <div> <div style="background-image: url(https://miro.readmedium.com/v2/resize:fit:320/0*IoN4BofrwCNWA_bS)"></div> </div> </div> </a> </div><h2 id="0933">A Message from InsiderFinance</h2><figure id="bb5e"><img src="https://cdn-images-1.readmedium.com/v2/resize:fit:800/1*X3mrYDdx2klkVa7Rv5AmWg.png"><figcaption></figcaption></figure><p id="05db">Thanks for being a part of our community! Before you go:</p><ul><li>👏 Clap for the story and follow the author 👉</li><li>📰 View more content in the <a href="https://wire.insiderfinance.io/">InsiderFinance Wire</a></li><li>📚 Take our <a href="https://learn.insiderfinance.io/p/mastering-the-flow">FREE Masterclass</a></li><li><b>📈 Discover <a href="https://insiderfinance.io/?utm_source=wire&amp;utm_medium=message">Powerful Trading Tools</a></b></li></ul></article></body>

Leveraged Trading: Pros and Cons

Increase your profits (but also your losses…)

Photo by Wance Paleri on Unsplash

Leveraged trading, also known as margin trading, is a tool you can use to amplify your potential returns. However, leveraged trading also comes with inherent risks that must be carefully considered.

That’s why it’s important to be aware of the pros and cons of leveraged trading.

What is Leveraged Trading?

Leveraged trading is a method of trading where you can amplify your potential gains (or losses) by using borrowed funds. It allows you to control larger positions in the market with a smaller amount of capital.

In leveraged trading, you deposit a certain amount of money, known as the margin, with a broker or an exchange. The margin acts as collateral for the borrowed funds. The broker then provides additional funds, typically a multiple of your margin, which allows you to open positions that are larger than your initial capital would normally allow.

The leverage ratio determines the amount of borrowed funds you can access. For example, if the leverage ratio is 10:1, for every dollar of your own capital, you can trade with ten dollars. So, with $1,000 in your account and a 10:1 leverage, you could potentially control a $10,000 position.

Here’s a simplified example to illustrate how leveraged trading works:

  1. You have $1,000 in your trading account and choose a leverage ratio of 10:1.
  2. With the 10:1 leverage, you can open a position worth $10,000.
  3. You believe the price of a certain financial instrument, let’s say a stock or a cryptocurrency, will increase.
  4. If the price rises by, for example, 5%, you would make a profit of $500 (5% of $10,000).
  5. However, it’s important to note that leverage amplifies both gains and losses. If the price had dropped by 5%, you would have incurred a loss of $500.
  6. If your losses exceed the margin you initially deposited, you may receive a margin call from your broker, requiring you to either deposit more funds or close your position to limit further losses.

Leveraged trading offers the potential for significant returns, but it also involves higher risks due to the amplified exposure to market movements. It requires careful risk management, a solid understanding of the market, and the ability to tolerate potential losses.

If you want more information about how leveraged trading works, you can find more below:

Pros of Leveraged Trading

First, leveraged trading allows you to amplify your profits by controlling larger positions than your available capital would permit. With leverage, your potential gains can be significantly increased if the market moves in your favor. This is especially beneficial in volatile markets or when trading highly liquid assets.

The ability to open larger positions comes with another advantage: you can take advantage of opportunities that would otherwise be out of reach. Leveraged trading opens doors to markets and assets that may have high capital requirements, enabling you to diversify your investment portfolio.

Then, leveraged trading also allows you to spread your capital while keeping your risk managed as you want. Indeed, since it’s as if you have more capital available, rather than putting it all into one position in the hope of making more gains, you can instead open several different positions in reasonable quantities. This is the approach I recommend.

Finally, leveraged trading provides the opportunity to profit from falling prices through short-selling. Indeed, because you can borrow assets with leveraged trading, you can then sell them at the current market price, and aim to buy them back at a lower price to make some profit.

Cons of Leveraged Trading

First, leveraged trading exposes you to increased risk, as any losses incurred are magnified. If the market moves against your position, you may face substantial losses that exceed your initial investment. It’s essential to be aware of the potential for significant losses and have a clear risk management strategy in place.

When trading on margin, you must maintain a certain level of equity in your account. If the value of your positions declines significantly, you may receive a margin call from your broker, requiring you to deposit additional funds or close out positions. Failure to meet margin requirements can result in the liquidation of your positions, potentially leading to significant losses.

Also, there can be psychological challenges involved with leveraged trading, particularly in volatile markets. The amplified gains and losses associated with leverage can induce higher levels of stress and anxiety. It’s important to avoid making impulsive decisions, especially when trading with leverage. You have to maintain discipline.

Finally, you may be prone to additional trading costs when trading on margin. Indeed, when you trade on margin, you are essentially borrowing funds from your broker. This borrowing typically comes with interest charges. These interest costs can eat into your profits and increase your overall trading expenses. In addition to interest charges, brokers often charge extra for providing leverage, executing trades, or managing margin accounts.

How to Correctly Trade With Leverage

I’ve already explained this in another article, but I’ll repeat it here in case you missed it.

Before trading on margin, you have to set specific risk management rules. Let’s say for example you don’t want to risk more than 1% of your account for each trade.

We’ll imagine you want to buy a fictive asset called “X”. Let’s say X’s price is currently $20 000. You have a $1 000 balance. You think X’s price will increase soon, so you’ll buy X. You also think X’s price can’t go lower than $19 900.

So you will buy X at $20 000 with a stop loss at $19 900. With your current balance, you can buy 0.05 X without margin. If your stop loss gets hit, you lose $5, or 0.5% of your account. But according to your risk management rules, you can risk up to 1% of your account for each trade.

So instead of buying 0.05 X, you can buy 0.1 X on margin. This way your risk will be 1%. Let’s say the margin requirement is 10%. You have to spend $200 as collateral to open a $2 000 worth position.

By doing this, you still have a $800 free margin, so you can, for example, open another $2 000 position using $200 to buy a fictive Y asset, and spread your exposure over many assets, while sticking to your risk management rules.

To summarize, you have to see margin trading and leverage as tools to stick to your risk management rules, not as a magic way to x100 your profits, or else you’ll blow your account faster than light.

Final Note

Leveraged trading is a powerful tool that comes with many pros, but there are also some drawbacks if you don’t use it correctly.

In this article, I just talked about the pros and cons of margin trading without explaining it in detail, so if you want to really understand it you should check the story I made about it: Margin Trading Explained

To explore more of my trading stories, click here!

If you liked the story, don’t forget to clap and maybe follow me if you want to explore more of my content :)

You can also subscribe to me via email to be notified every time I publish a new story, just click here!

If you’re not subscribed to Medium yet and wish to support me or get access to all my stories, you can use my link:

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