Using leverage effectively when trading CFDs requires a proper understanding of the risks that it can incur. Leverage can amplify gains but also magnify losses, quickly and unexpectedly so its crucial to use it cautiously. In this article, we’ll explore how you can effectively manage leverage with the help of T4Trade.
Gaining a proper understanding
Contracts for Difference (CFDs) are highly leveraged financial instruments. So if you’re about to embark on the road of CFD trading, knowing how to use leverage properly is key to safeguarding your funds. Understanding means educating yourself on the principles of CFD trading and how leverage can impact trading outcomes. Gaining an education is relatively easy today, particularly when a wealth of information exists all across the internet. Notably, most of this information is typically free to consume. How you educate yourself is entirely up to you. For example, T4Trade offers its traders access to all manner of resources that suit a host of learning styles. In fact, we cover the different ways to learn more about trading in general in this article. The T4Trade Academy provides crucial insights on a broad range of topics, including leverage, CFD trading, etc, which are delivered via podcasts, webinars, e-books, videos -on-demand, and even Live TV. This is further boosted by the T4Trade blog page which also dives deep into trading fundamentals, providing value to all types of traders, be they novice or more experienced.
Building a trading plan
After you’ve spent sufficient time building up a knowledge base, and truly understand the implications of leverage, use this information to create a strategic CFD trading plan. This plan must incorporate the ways that you intend to manage positions with risk management tools, thereby mitigating the volatility that comes with using leverage. The plan must also align with your budget and the style of CFD trading you’ll be adopting. Further, a trading plan will also help you better handle the emotions that trading tends to evoke. Be this fear, greed, impulsion – a well planned trading strategy will keep you disciplined, thereby reducing the potential for poor trading outcomes.
Have an effective risk management plan in place
Being that CFD trading is a highly leveraged activity, having a proper risk management plan in place to protect your money is important. This entails putting in place certain measures that will ensure you limit losses or lock in your profits. Two of the most popular risk management tools utilised during CFD trading include stop-loss and take-profit orders. Let’s look at these in a little more detail:
- A stop-loss order is designed to automatically designed to close an order when when the market price reaches a particular threshold. Its goal is to ensure that losses are limited. There are four methods of stop-loss orders, namely percentage stop, volatility stop, chart stop, and time stop.
- A take-profit order on the other hand seeks to lock in profits at a predetermined price level. Seeing as this happens automatically, traders are not under pressure to constantly monitor their open positions.
T4Trade understands that leverage can be risky, and therefore strive to help traders manage it better, be this through educational resources, or via its customer support team that’s on hand 24/5 to provide assistance on a range of issues or challenges.
Understand the concept of margin calls
Margin and leverage are closely interlinked, the one impacting the other. When a margin call occurs, the trader is essentially asked to deposit additional funds into their account to cover losses or close a position to limit further losses. The call is typically issued by a broker when a trade moves in an adverse direction, and the trader’s account balance falls under a specific level. The higher the leverage utilised, the higher the risk of amplified losses that may be difficult to cover. This makes using leverage carefully even more important.
Avoid overtrading
Leverage has often times being referred to as addictive, creating a high that leads to potential overtrading. Overtrading is also driven by feelings of fear, excitement or greed. Avoid overtrading by sticking to your trading plan and avoiding making impulsive decision. Furthermore, consider diversifying your trading portfolio as having more than one position open can help reduce risk by spreading your investment across multiple classes of assets. Additionally, stay within your budget, using only capital you have. In other words, never trade using more funds than you can afford to lose.
Portfolio diversification
Leverage is essentially borrowed funds. To optimise your potential for success, consider diversifying your portfolio rather than invest all your funds into one position. Why? Well, if the market moves in a less than stellar direction, you risk losing all your money. Alternatively, as we mentioned above, by diversifying your portfolio across a variety of asset classes, you spread the risk. Therefore, if one position performs badly, there are others to fall back on. As a result, losses aren’t as magnified in the same way as they would be if all your capital was invested into one trade. With T4Trade, you can trade over 300 instruments from 6 asset classes via CFDs. You can choose from metals, currency pairs, commodities, stocks, futures and indices. You’ll also enjoy excellent trading conditions and dedicated support, 24 hours a day, 5 days a week.
Learning how to use leverage via a demo trading account
Another way to become more comfortable with using leverage is by getting more practice via a demo trading account. Using a demo account allows you to see how leverage works in a simulated environment, utilising virtual funds, without risking real capital. With a demo account, you can test out your CFD trading plan, execute trades, and assess outcomes. In this way, you can also identify the strengths and weaknesses of your plan, and make adjustments if necessary. You also have the opportunity to apply technical and fundamental analysis, explore charts and economic indicators, etc, so that you become better informed before making a trading decision. Ultimately, a demo trading account gives you the time needed to refine your skills, boost your expertise and build the confidence needed to trade live.
Trading with T4Trade
T4Trade is a powerful broker that seeks to optimise their trader’s CFD trading experience. They do this by providing extensive resources to help traders acquire the knowledge needed to increase the likelihood of trading success. T4Trade traders can also enjoy trading more than 300 underlying assets, be this forex, stocks, futures, indices, commodies or metals. They also have access to flexible leverage, multiple account types to suit all traders, competitive spreads, fast withdrawals and deposits, and quick executions. This is of course enhanced by 24/5 multilingual, top-tier customer support.
All trading involves risk. It is possible to lose all your capital.
DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication
