Ranging from the different strategies you use, to the type of trading you prefer, there’s a wide variety of aspects which go into trading on the financial markets.
In order to have the highest chance of success, and create an overall profitable trading experience, you need to ensure you fully understand these aspects and their benefits.
As such, this article will take you through one of these aspects of trading – leverage.
Read on, for the ultimate guide to leveraged trading, including what it is and how it can bring a host of benefits to your trading journey.
What is leveraged trading?
Leveraged trading is a process which allows you to open a position with a significantly lower amount of capital but greater exposure to the market. This is often used when trading financial derivatives, such as contracts for difference (CFDs).
When traditionally trading, you have to deposit a substantial amount of capital to take ownership of the underlying the asset. With CFD trading, you purchase contracts on an underlying asset, speculating whether it’s price will rise or fall, and earning a profit or loss based on the difference between the opening and closing price.
With leveraged trading, the amount of capital you deposit for your CFD trade – known as the margin – can allow you to open a position worth significantly more than what you initially deposited.
For example, with a leverage ratio of 30:1, you’d be able to deposit £1,000 capital, and trade an asset(s) worth up to £30,000.
Different trading platforms will offer different leverage ratios, so be sure to find one which allows you to have the highest chances of profit when leverage trading.
How can leverage trading benefit your trades?
Leverage can be complex, but if you use it effectively, it can bring a wide range of benefits to your trades. These include, but are not limited to:
- Potential for increased profits
Leveraged trading can allow you to have substantially increased profits on your successful trades.
You can gain greater exposure compared to the lower capital you deposited. When you make a successful trade, your profits are calculated against the leveraged amount.
For instance, using the example above, your profits would be calculated against £30,000, not the £1,000 margin.
However, it’s important to know your losses will also be calculated against your leveraged amount, just like your profits, so be cautious when trading with leverage.
- Greater exposure to the market
Another benefit of leveraged trading is how it can open up your trading opportunities and give you greater exposure to the market.
With traditional trading, the amount of market exposure you gain is based on the amount of capital you put down to take ownership of the underlying asset. To gain greater exposure, you need to deposit an equally large amount of capital.
However, with leveraged trading, you can increase the exposure you gain to the market, with a much smaller deposit.
For instance, if opening a position on shares, you can put down a small amount of capital, but trade a significantly higher number of shares than you could have with traditional trading.
This will allow you to increase your opportunities for profit when traded successfully, since you’re trading with a higher amount of exposure compared to what you deposited.
- Take advantage of low volatility
Leveraged trading can also give you the ability to profit from any market conditions, particularly when there is low volatility.
Often, low volatility markets don’t produce as much substantial profits, since the price movements are usually minimal, and therefore, the profits incremental.
However, leveraged trading offers you much greater exposure on the market, so a small price value change in a low volatility market, will still result in a substantial profit for a successful trade.
With leveraged trading, even the smallest asset movements on low volatility markets can produce significant profits for traders.
Naturally, be aware that volatility could change at any moment on various markets. External factors, such as changes in a company structure, for instance, could play a significant role in this, so be sure to keep an eye on them – the Regulatory News Service (RNS) could prove beneficial here.
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Understanding leveraged trading can increase your chances of profit, especially now you know how to incorporate it effectively into your trading portfolio.
