In terms of trading, leveraging means the ratio of the size of the trading transaction to the actual investment used. In layman’s terms, it is a loan provided to the trader. This means that a trader can conduct a transaction without having to put up the full amount required. This can ultimately increase the returns made on investments.
If this sounds appealing to you, here are four steps to leveraging your trades.
- Firstly, if you want to utilize leverage when trading, you will need to open a margin account with a broker. The broker will then be able to provide you with leverage. A broker can help you in other areas too, for example if you want to Trade CFD.
- Use leveraging sparingly, and only when you need it. Even the most seasoned trading professionals do this. Because leverage is a loan, it entails a lot more risk than if you were to use money alone. If you trade with a large leverage and make a mistake you could end up owing a heck of a lot more than you can afford.
- If you are using leverage, don’t use it alone. It should be one of many tools that you use to profit from trades. This diversification of methods will help to prevent from any unsavory situations (like the one above).
- Don’t get a higher leverage than 10:1. You will probably find that most brokers won’t go higher than this anyway.
The above being said, trading using leverage is no more risky than trading using cash. Risk is just the nature of the game.