You need to have detailed information about the economy and the financial developments to be able to effectively trade CFDs, particularly the Forex market. But truth be told, it is not always about the global economy or the information from the financial industry that’s hindering the success of new traders. It is actually the lack of knowledge about leverage and how to use it to minimize losses and increase the gains.
What Are The Risks of High Leverage?
Leverage allows investors to borrow money from the broker. You can get a significant amount from your broker after paying an initial margin even without owning the underlying asset.
Back in the day, brokers, we’re able to offer as high as 400:1. With this leverage ratio, you only have to deposit a margin of $250 and you can take control of as much as $100,000 that you can use to open multiple positions.
But in 2010, there was a regulation that limits the leverage ratio offered by brokers, particularly in the United States. The leverage ratio went down to 50:1, but this amount is still large. With this leverage ratio, you pay the initial deposit of $250 and you get to have $12,500 in your trading account.
Picking The Right Leverage Level
- Before you use leverage, you must understand several rules so you can pick the right leverage level for you. There are three rules that you should follow;
- As much as possible, maintain a low leverage level.
- Utilize trailing stops because it helps reduce the downside of trading and also enhances the protection of your capital.
- Limit the capital to 1-2% of your overall trading capital every time you open a trading position.
It is important to choose the level of leverage that you are most comfortable with. If you don’t like taking too many risks and consider yourself a conservative trader, you can lower your leverage to 5:1 up to 10:1. This type of leverage is also applicable to those who are still learning to trade.
Limit Stops and Trailing Stops
If you want to protect your trading capital, you can use the trailing stops or limit stops because they are very reliable in reducing the losses whenever your trade turns sour. With the use of limit stops, traders can limit the possible losses as they learn more about the financial market and how to properly trade. Limit and trailing stops are very important because it also reduces the emotions that are involved in trading. This gives time to traders to have a breather away from their computer and unnecessary emotions when trading.
The Importance of the Right Leverage Level
Leverage is a powerful tool when trading CFDs. It allows you to open huge trading positions without the need to pay huge initial deposits or own the underlying asset. But you must remember to use it appropriately. You must determine the right leverage level based on your risk tolerance, experience, and comfort. Also, do not forget to use trailing stops and limit stops to protect your capital.
Breaking point and following stops are vital in light of the fact that it additionally decreases the feelings that are associated with exchanging. This offers time to dealers to have a breather away from their PC and pointless feelings when exchanging.