Risks & Rewards

One of the biggest Rewards to leverage trading is borrowing capital to increase your initial position on a LONG/SHORT Trade.

1. Access to larger positions

Because you are accessing additional funds, your position sizes will be significantly larger than your initial capital, which has the potential to create higher profits.

2. Potential for higher returns

As we demonstrated above, larger position sizes can also result in higher returns compared to trading without leverage.

3. Capital efficiency

Using leverage allows you to maximise the use of your capital, as you can maintain a smaller cash balance in your trading account while still gaining access to larger positions, which frees up funds for other opportunities.

Remember, accessing larger position sizes comes with significant risks, which can be detrimental if you get your analysis wrong.

One of the biggest Risks to leverage trading is if you bet incorrectly your position may be liquidated.

1. Increased losses

Even small market movements in the opposite direction can increase your losses.

2. Interest charges on borrowed funds

As you are borrowing funds, this will attract interest charges, which accumulate over time, depending on how long the position is open. Of course, these charges will reduce your overall profit or add to your losses.

4. Overleveraging

While leverage trading is attractive, many traders open large trading positions without consideration for the significant risks they are taking. As a consequence, they trade outside their comfort level for fear of missing out believing the next trade will go in their favour.

5. Limited risk management

Most traders overlook the importance of risk management, which leads to devastating consequences. You must practice good money management to mitigate risk and maximise rewards.

6. Faster-paced trading

Leveraged trading is about using short-term strategies in a fast-paced trading environment, which can be stressful and demanding.

To manage the potential losses, you need to ensure you use solid risk management strategies, such as stop-losses and continually monitor your positions.

Understanding risk management is crutial to leverage trading successfully.