What Is Leveraged Trading?

Financial traders are always looking for an edge. If you are making moves in the financial markets you are looking to make a profit. Sometimes that is hard to do if you do not have a ton of dough to start with. You need a way to use your access to the financial markets as a way to make more profit than you might have. That is where leveraged trading comes in. You take your knowledge of the market and use it to leverage the credit that your online trading platform will extend you in order to trade efficiently and make a profit.

When you engage in leverage trading, you need to be skilled at risk management. Very skilled. Because you are not just risking the money you have you are risking money that you don’t have. Everyone in the financial world uses leverage to increase the chances of making a return. Companies really do make more money by using debt to increase their capacity or productive power. That is the nature of capitalism. Traders can do the same thing with leveraged trading. They just need to be careful and prudent.

When you use a margin account to increase your trading capacity, you are working with money that is not yours. That can be a very precarious situation for inexperience traders. It is best to approach leveraged trading with a very, very conservative approach that utilizes as many risk management techniques as possible.

Take forex trading, for example. Experienced forex traders can use leverage to profit from currency price differences on the global market. They can take a loan from their broker by opening up a margin account. That allows them to trade a large amount of capital that they don’t necessarily have in their account. For example, if they have $1,000 in their account, a trader might be able to work with $100,000 in the margin account. It must be stressed that this can be a very risky proposition. If a trader’s positon goes south quickly, they will be on the hook for the amount lost, no matter what is actually in the account. This leverage of 100/1 in the forex market is unique to currencies. Because currencies do not fluctuate very much in a given day, brokers are much more comfortable with offering such high leverage.

In other markets, such as equities or futures, the leverage that brokers are willing to offer are much less lucrative for traders. Because the price is so much more likely to spike up or down in those markets. The risk to brokers is too great for them to get into the high leverage business with a majority of traders.

Forex traders are very attuned to the use of stop orders and limit orders. Risk management is second nature to experience forex traders. If you want to be a profitable forex trader, you need to be excellent at risk management. You need to develop ice in your veins. You need to be on top of your trades and use of funds at all times, so you do not get caught unawares.

Having a plan for how each trade is going to go is vital to your success as a trader. There is nothing more likely to make you a mark in the market than when you saunter in without a clear plan for each trade. When you have a prior understanding of how much profit you expect to take, then you are better able to make rational decisions in the heat of the moment. That is also key to being profitable. Having control of your emotions is very necessary to being successful.

For more info on leveraged trading, look to this resource for picking the right platform that will match your risk appetite and strategy.

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