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If you have ever come across Forex or CFD trading before, you may have heard the term leveraged trading. It is a facility offered by brokers, which involves you borrowing money on a specific trading position, to amplify the buying power of your trade. The limit of the leverage depends on the broker and on the specific regulatory rules it must follow, however it can start around 5:1 and go up to 1000:1.
Leverage multiplies the value of your trade if you choose to use it. Using leverage of 5:1, multiplies your deal size by 5 times, and using leverage of 1000:1 multiplies your position size 1000 times.
Leverage is a great tool for those who want to gain a lot of exposure to the markets with limited capital, as it can bring massive rewards. For example, in the case above 5 times greater or 1000 times greater than your capital would normally allow. But it’s important to remember that leverage comes with risks too. For instance, if you are placing a trade on BTC/USD with $100, using a leverage facility of 5:1, means that if your trade is successful you can profit 5 times higher than you would have if you had not used leverage, but you can also lose up to 5 times more as well. When you are talking about a leverage of 1000 times, if the trade goes against you it can wipe up out your entire capital in one fell swoop, and even put your account into negative, unless the broker offers negative balance protection. This is an important tool, which can ensure you don’t get into deficit when trading, as your account will only go to minus.
For this reason, a good rule of thumb is, beginner’s should start with minimal leverage. Once you build up your confidence and expertise, you can then start taking advantage of greater leverage offers.
Advantages of leverage trading
- Gain access to much greater exposure than your capital would normally allow, by taking much larger position sizes
- As with taking a mortgage on a house, leverage frees up your personal capital to use in other ways, as you only need to use a little of it to place a trade.
- Leverage frees up your capital since you only have to commit a fraction of the value of the assets you are trading.
- Your profits are amplified many times over (but your losses are too!)
The importance of risk management
Likely, most retail traders are aware of the benefits and drawbacks of leverage, but for institutions and professional traders, leverage is a part of their daily trading practice. When using leverage to trade, remember to employ risk management, including trading tools like Stop Loss – which will stop out your trade automatically when it sinks to a predesignated amount, and Take Profit, which will book your profits automatically, once the asset price hits a certain level. Another risk management tool to consider is your deal size ratio, e.g. how much you invest per trade, usually between 1-5% of your total capital amount for beginners.
While leverage trading is widely used in online Forex trading, did you know that you can also use it for online crypto trading? One platform, called Gains network, has developed a decentralized trading platform that sits on the blockchain and specializes in the trading of crypto and other assets with leverage. It takes advantage of all the merits of the blockchain, eg, security, privacy, decentralization, to give traders a next level option for trading leveraged products. Gains network offers up to 150 times leverage on cryptos, and up to 1000 times on forex across many assets and pairs, including cryptocurrencies, forex, stocks, commodities and indices. Trading fees when compared to online platforms are extremely competitive too.
While the blockchain is fairly new, DeFi, which stands for decentralized finance, is becoming an increasingly popular way for investors and traders to engage with the financial markets. Because the blockchain automates all transactions, the data and trade outcomes are completely untamperable and there is no conflict of interest between the platform and the trader, as there is with centralized online brokers.
Final Word
Leverage trading is an important feature for any trader to understand. It is a powerful tool, which must be used wisely to bring greatly multiplied profits to a trader and sparingly until a trader feels confident to increase his trade exposure size.
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