Look, trading with leverage sounds great; we know that. And, yes, it certainly is an amazing possibility to instantaneously increase your purchase power without having to spend months sweating for it. However, leverage trading can be very dangerous if you don’t understand what you’re doing. That’s because, if you approach it wildly or without taking the correct precautions, you may end up killing any possible profit or even wasting away all your money.
And you don’t want to waste your time, let alone your money.
That’s why you need to understand the dangers of trading with leverage before you even start calculating how many millions you’ll be able to spend.
With that in mind, let’s delve into the Do’s and Don’t’s of leveraged trading.
What Is Leverage?
A quick summary of what’s leveraged trading would be necessary before we go any further. You really don’t want to trust your money to strategies you don’t even understand.
What’s known as “leverage” in the FOREX industry is, essentially, using “borrowed” money for acquiring greater values than what you can afford.
Let’s take on an example to understand it better.
Let’s say you want to acquire a car that costs $5,000 and you only have $1,000. You could ask for a 1:5 leverage to raise your money and acquire that asset.
Taking this into FOREX, we’ll see much higher leverages.
The difference between leverage and borrowing money is that you’re not expected to pay back, but your money will be held as collateral in case of losses.
Now, Onto What You SHOULD Do With Leveraged Trading.
- Do Your Math Correctly.
Leverage trading multiplies your purchase power depending on how much you’re using.
Before you start trading with leverage, make sure you’ve calculated how much you’ll be able to acquire.
However, your possible loses can be more important than your potential profits.
Seeing how leveraged trading increases how much you can lose from your capital, you should take into consideration the amount you could lose with the leverage you’re looking.
As a general rule of thumb, never enter a trade without having an estimate for every possible outcome.
- Use Stop-Loss Orders.
Whether you’re using leverage or not, you should always cover your back with stop-loss orders.
However, seeing how leveraged trading can affect your loses so significantly, it is even more important to take care.
Not only is it more critical, but it could be harder as well.
While you can easily predict low numbers when not using leverage, leverage trading will also make you reach your stop-loss point faster.
As such, you should increase your stopping point, but never stop using them.
- Be Mindful Of Your Margin.
The dreaded margin call is that alert from your broker telling you that you’ve reached the minimum amount of capital in your account.
Well, trading with leverage can bring this upon you much, much faster.
You see, leverage can make you win money much faster. But, it can also make you lose it quicker as well.
Receiving a margin call is not the end of your career. However, it does mean that your broker can close any position it deems as too risky or capital-consuming.
And, yes, that includes those positions that, although risky, can save you from a losing streak.
But, What Should You AVOID When Trading with leverage?
- Don’t Overdo It.
It’s easy to fall into the mindset of “more leverage, more profit” and go crazy with 1:1,000 leverage trading.
However, while that means that per every $1 you can make $1,000, it also means that per every $1 you may lose $1,000.
Once you couple that with the ever-present losing streaks, you see why leverage trading is often cited as the #1 killer for FOREX traders.
Most experienced brokers use small, 1:5 (as a maximum) leverage for a reason.
- Don’t Lose It When Losing.
As with the previous point, self-control is your friend.
Don’t trick yourself into believing that you should compensate for losing trades by increasing your leverage. That will kill your career.
Most brokers take this gambling mindset that you should always double your bet after every losing hand. However, said mentality does more harm than good, much more harm than good.
- Don’t Go In Unexperienced.
Leverage trading is a step-up for traders where your positions go from a few hundred to a few hundred thousand.
From that previous sentence, notice the “step-up” part.
That’s because, when you use leverage, you start operating with numbers that are much higher than when you first started. Additionally, there’s the previously mentioned point that calculating risk is more complex with leverage.
Most FOREX brokers offer demo accounts for you to practice, and there’s plenty of content on the internet.
Don’t use new tools if you don’t understand them.