The Benefits and Risks of Leverage Trading
Leverage is a feature that enables traders to invest less capital while still getting large exposure to the market. This means you can deposit a small amount to open a trade with much greater market exposure, usually on a ratio provided by your CFD Broker. With such reward comes risk; in this article we look at the benefits of leverage trading, as well as mitigating some of the associated risks.
What Are the Benefits of Using Leverage?
Risk vs Reward:
Only needing to invest a small fraction of the total trade value while still making the profit of the full face-value, is definitely a benefit. Your returns are multiplied on your successful trades, but also magnified on your losses.
Diverse opportunities:
Only needing a small portion for your investments frees up capital that you can now use to invest elsewhere, essentially offering better opportunities to diversify your portfolio and hedge your bets. Increasing your available amount is known as gearing.
The Short and Long of it:
When trading with a CFD broker using leverage, you are able to benefit from both increasing and falling markets, this is known as going long (increase) and going short (falling). No matter the market conditions, there is always opportunity to profit.
Round-The-Clock Trading:
Trading hours vary from market to market however with a CFD Broker, one is often able to trade multiple asset classes, like forex and Indices, 24/5 and Cryptocurrencies 24/7.
What are the Risks of Leverage Trading?
Magnified losses:
While it is exciting to see your profits rapidly and exponentially increase, it’s a lot less fun to watch it disappear. It can be easy to forget the value of your initial investment and the risks of loss. Try considering your trade at full face value in order to manage your risk accurately.
Margin and Margin calls:
Some brokers have margin rules set in place that they enforce on your trades in order to prevent your entire margin depleting and going into a negative. This is known as Margin call, and may be applied when your available margin decreases by a certain percentage. Your broker will close your trade/s in order to protect your liquidity. They may also require you to add more funds to maintain a margin of a certain percentage.
Swap Fees/ Charges:
As you are effectively loaning money from your broker, if you choose to keep a trade position open overnight, the broker will most likely charge you a fee to do this. This is often referred to as a Swap Fee and is usually a nominal value compared to your trade investment.
Managing Your Risk:
As shown, this kind of trading can come with certain risks. Here are a few key points that could help you lower the risk exposure of your portfolio when trading with a CFD Broker.
- Using a stop when trading, can help you exit a trade at a reasonable price if the market turns against you.
2.Using a broker that has measures to reduce risk in place can really benefit These types of accounts protect you from losing your entire margin with a margin call and
strategic account liquidation to protect your open trades.
The Best CFD Broker offering Leverage?
When it comes to choosing the right broker for you, we recommend CedarFX, the World’s first green broker.
CedarFX offers leverage of up to 1:500 on multiple asset classes such as forex, stocks, cryptocurrencies, commodities and metals. They provide rapid deposit and withdrawal processes, 0% commission accounts and 24/7 expert customer support via call, live chat or email.
CedarFX operates at 100% margin and 70% margin call, ensuring your account has added protection. They offer stop out features, hedging and scalping as well as news trading and the use of electronic assistants.
Cedarfx uses MetaTrader 4 to flawlessly integrate their innovative Brokerage to an award- winning trading platform, bringing you a professional-level trading experience with technical tools and indicators available in abundance.
Don’t hesitate to take advantage of this Broker.
