Leverage is indeed a very powerful tool when it comes to trying to get something big out of the market. By using some leverage, you can control more amounts with just a small chunk of your capital. It can give you a shot for higher profits.
However, it’s also true that leverage is a double-edged blade—as true as a coin that has two sides. While it can balloon your potential profits to high levels, it can also magnify the potential losses that you could incur.
This is why it’s important to use leverage with all the prudence and safeguards you can use with it. In this article, we will give you some tips on how to use leverage prudently and we’ll give you an idea how much leverage is ideal for your trades.
Keep an Eye on Risks
Risk management is a very crucial part of a trading plan. There will always be risks, and that means that your strategy should cover all possible bases and explore all avenues to make sure that you won’t be taken off-guard by sudden market movements.
Indeed, risk management should be at the top of your list. That’s doubly true if you’re using huge amounts of leverage.
Learn how to spot risks and then analyze or evaluate them, taking time to know which risks are necessary and which are unnecessary. Remove those risks you think you can trade without, and then find ways to minimize the risks that you can’t drop.
Never forget Stop Loss orders (and other orders)
Many financial markets are up 24 hours a day nowadays, though there are certain times when trading volume would be higher than other times. You cannot stay awake for the duration of 24 hours, and sometimes traders find their trades losing overnight, while they dream.
That situation, plus a plethora of other unimaginable trading catastrophe, can come true if you don’t use stop loss orders.
Stop loss orders are a trader’s friend. A stop loss order is a command on your trade in which you determine a loss amount at which your trade will automatically close. It acts as an insurance and it removes the emotion from trading as well as some level of uncertainties since you already know beforehand how much you are going to lose in case you really lost.
Keep a Clear Head
As we all know, trading isn’t for the faint-hearted. This means that you have to have strong emotional wall that will protect you from the peaks and valleys of the market. Most of the time, traders face situations that make them feel anxious and causes them nightmares before they sleep (if they even manage to sleep at all).
As for leverage, the mere fact that you’ll be using something that can disproportionately magnify your potential losses can already make you feel like you’re sitting on pins and needles. Remember to gauge your risk tolerance first before you commit into using huge leverage for your trades.