In simple terms, leverage means the amount of money that the broker lends you to trade or invest in a market or an asset to make a larger profit. Leverage trading is a vital tool for investors to increase their returns. However, there are potential risks associated with this type of trading. This form of trading is practiced on the Forex market and requires the right knowledge and experience for handling the highs and the lows.
Also, leverage trading is known as margin trading because it enables investors to open trade positions with a broker, using a small amount of capital so they can take a larger position in the market. Margin trading is shown as a percentage of the total size of the position. Investors need basic knowledge in leveraged trading to manage risks and fast-track their returns. The first thing to understand before diving in, how does leverage work in trading?
Beginners can start with a wide range of educational materials on leveraged trading on NAGA. They can get access to webinars, access e-books, and make the best of the articles on leveraged trading. Also, some expert traders can assist first-timers with one-to-one sessions.
What is leverage Trading?
The definition of leverage trading is when investors borrow a sum of money from the broker to use for trading and investing in assets to gain a profit. Leverage trading attracts thousands of investors worldwide who are looking to make larger profits. Moreover, one needs to be aware of incurring losses with leveraged trading.
Experts recommend that leverage trading should be done carefully with a full understanding of the market. If you want to know more about what is trading on leverage, keep reading.
How does Leverage trading work?
A broker offers the amount of leverage based on their regulations and the limit set by government authorities and licensed financial institutions and the maximum amount you can avail will depend on your experience level. Regulations offer advantages through the broker to investors such as negative balance protection and zero commissions & interests.
Few leverage ratios are capped accordingly-
20:1 for gold, minor currency pairs, and major indices,5:1 for stocks2:1 for cryptocurrencies30:1 for major currency pairs 10:1 for commodities excluding minor equity indices and gold.
Investors must remember that whether they are making profits or incurring losses, they must return the amount they leveraged back to the broker. This can be a challenging situation when investors borrow a questionable amount. At NAGA, we suggest investors leverage a small amount of money to have no difficulty with paybacks.
What is Margin?
Margin is the initial requirement set by the broker that investors should meet to get access to the margin. It can also be referred to as the initial deposit or the amount you pay to activate your trading account. The minimum margin payments can be between $10 to $300 and for advanced margin, it can be $2000.
What are the pros of Leverage Trading?
One of the first advantages of leverage trading is the access to additional funds in your account because you are borrowing the money to get more market exposure. After you are exposed to larger positions in the market, you can increase your returns exponentially.
Another pro of leverage trading is interest-free loans. The amount you borrow from the broker does not come with any form of interest or obligation for commission and it can be used in any way that you want while trading. Alongside this, you can trade the premium markets and exclusive & expensive instruments by creating more opportunities for investors to make a profit.
Also, traders can mitigate against a low volatile market with little or no price movements. Leverage trading allows investors to bank major profits during low volatility.
What are the cons of Leverage Trading?
Leverage trading involves margin rates when you borrow the amount. Investors can face difficulties while paying large fees to access leverage easily. Plus, there are risks associated with leverage trading because you will incur potential losses just like you can make profits.
The margin call risk can occur when you face too many losses that exceed your margin. This can be the scenario when you have open trading positions in dynamic markets.
Few tips for beginners for leverage Trading –
- Have a trading plan -You may use any strategy but you must research well and look for the best possibilities to earn profits without risking your funds. Stick to a solid plan and be ready for the results with a positive mindset. Also, understand how to leverage trading work.
- Define the risks - A trading plan will have its risks and without risks, you cannot trade. Hence, define the risks and understand what you can face before going all in. try leveraging 50% of your money, and the rest you can keep as a backup.
- Never put in your whole account - Understand the different ratios and set up your risks aside. Take heed of your account and protect its health to continue trading with limited risk and maintained discipline.
Leverage in Stock Trading
When trading forex in leverage trading you can profit from small price changes in currency pairs. The leverage ratios limit to 30:1 for forex trading when trading major currency pairs and can be 20:1 for minor forex pairs. Also, they can peak as high as 200:1 or 500:1 according to the demography. The ratio changes according to the trading experience. The trading ratio can give you either a higher chance of making profits or incur losses during forex currency trades.
Leveraged ETF Trading
A leveraged ETF allows investors to use financial derivatives and borrow funds from brokers to magnify their returns. ETFs are used by traders to speculate on an asset and to expect profits they can have by trading traditional or standard ETFs.
The ratio of leveraged ETFs can range between 2:1 and 3:1 based on the trader's experience. Similar to stocks, one can trade ETFs in the form of leveraged CFDs.
Leveraged Stock Trading
Leveraged stock market trading allows traders to borrow funds from the broker according to their experience and set a limit to increase their position’s size. Leverage stock trading can help you make more profits than you would have made with your initial funds.
Also, the individual stock trading leverage ratio is low when compared to other financial securities. For example, the UK market ratio is capped at 5:1, which is a 20% margin for major stocks like Amazon and Tesla. It can go as high as 10:1 with the rest of the brokers not regulated by ESMA.
Cryptocurrency Leveraged Trading
We are aware of the volatility of cryptocurrency that signifies the sudden price falls that can affect trades negatively. Usually, traders are extremely careful trading leverages on cryptocurrency because mis-speculation can incur huge losses. Due to the risk traditional cryptocurrencies bring, the ratio is 2:1 and the highest is 5:1. The ratio of leveraged crypto is low compared to other financial securities.
What are the different leverage trading risks?
Leverage trading is highly-risky, and prior experience is a must according to experts it has a chance of incurring potential losses. Traditional methods of trading cause risks, but applying leverage to trade can have you to incur risks.
Trading leverage can be interesting and it can help you gain great profits. However, there are equal chances of the trade going against you and you may end up facing considerable losses.
Trading leverage and facing losses can put your margin at risk and you have to recover from paying back the broker and from suffering losses. Therefore, beginners must understand all possibilities of profits and losses equally before deciding to apply leverage on trades. There are several ways to handle and reduce risks, a few of which will require you to learn risk management from experts.
The most commonly used risk management techniques are take-profit and stop-loss orders. These orders are available for both traditional and leveraged online trading practices for worldwide crowds.
Conclusion
Leverage trading can be quite dangerous for both professional and beginner traders as there is the unpredictability of the market movements that can lead to big losses. However, it interests several traders who can trade with both long and short positions depending on their experience in the market and the funds they want to invest.
Leveraged trading is recommended for those with enough experience with the financial market. When they face losses, they can recover faster and have an alternative plan for people.
For example, Fees and commissions can surely add up when you are trading stocks, so it is important to be prepared beforehand and be ready for a negative consequence during a stock market crash. NAGA offers excellent customer services and its extensive trading platform is very easy to use and ideal for beginners.
Also, they can use the Autocopy feature which can help them learn from the experienced individuals. They can share, comment, post and interact with experts and mirror their trades to gain exposure in the market. Trade with leverage on the NAGA trading platform make use of its exclusive benefits today.
Disclaimer:This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication.
