The most successful trading journeys are comprised of expert strategies, in-depth understanding, and skilful analysis across various different aspects of trading.
With such complexities attached to all forms of trading, even the most experienced traders can sometimes be caught out with some simple mistakes made during their trades.
Among the many components of trading, one of the areas which traders so often make mistakes in, is trading with leverage.
When paired with extensive knowledge and dedicated planning, trading with leverage can be highly beneficial to your trading journey. However, should you fall victim to any of the common mistakes, it could prove detrimental to your potential profits.
To help prevent this from happening, this article will take you through some of the common mistakes you need to avoid when trading with leverage.
What is trading with leverage?
Trading with leverage involves the ability to open a trade position on an asset, with a much higher level of exposure compared to your initial deposit of capital.
Leveraged trading is often used when trading contracts for difference (CFDs), and this gives it many qualities different to traditional trading.
With traditional trading, you must deposit enough capital to take full ownership of the underlying asset. However, leverage trading with CFDs involves purchasing contracts on an asset which doesn’t require ownership, and needs a much smaller deposit for speculation on the price value.
The specific amount of capital you need to deposit is known as the trade margin, and this will vary depending on the leverage ratio of the asset you want to trade.
Let’s say you want to open a position on an asset with a leverage ratio of 1:10. This means that with a margin of £1,000, you can trade up to £10,000 on the asset, with much greater exposure than your initial deposit.
When it comes to closing your position, your returns will be calculated against the leveraged amount, meaning your profit or loss will be in accordance with the £10,000, not the £1,000.
Leveraged trading mistakes to avoid
Whilst it can be highly useful when used right, leverage trading can often lead to crucial mistakes that have significant impacts on your trade profits. Here are a few of the mistakes you need to watch out for:
- Being unclear on how leverage works
Many traders make the mistake of being uninformed on how exactly leverage works, or misunderstanding the risks that are always present when using it.
On the one hand, leverage trading can bring many benefits to traders, when used as part of a clear, well-planned, knowledgeable strategy.
However, the risk involved is that should your leveraged trade be unsuccessful, your losses will be calculated against your leveraged amount, just as your profits would.
This means that even though you may have put down a small amount of capital, your losses will be significantly greater due to them being calculated against the exposure your small capital produced.
Therefore, if you have a clear understanding of leverage trading fundamentals, you can avoid being hit with substantial losses from a poorly planned trade.
- Choosing the wrong trading platform
Another big mistake when using leverage, is not choosing the right trading platform.
Trading platforms are absolutely essential when it comes to all types of trading, as this is the main area where your entire trading journey takes place.
This means that everything needed to increase your chances of success with leveraged trading, will be determined by the expertise of your platform.
Therefore, be sure to choose a professional trading platform that can offer things such as risk management tools, which will ensure all your leveraged trades are aided by the best features and tools for success.
- Inadequate market analysis
One thing that can be highly detrimental to your leveraged trades, is the level of market analysis you conduct with every position you open.
With such high levels of risk and potential profit in the balance with leveraged trades, you need to ensure your trades are as accurate as possible.
With technical analysis, you can conduct detailed observations on market performance and all things related – asset movement, external events, etc.
This will give you the clearest picture of how the market is performing, so you can open your trade at the most appropriate time and place, resulting in a higher chance of a successful leveraged trade.