How leverage affects your trading behavior
How often do we see the slogans of fantastical earnings and “x20” of your capital? How often do you know and understand exactly what you are doing and how it works?
The CopyRage team will be happy to help you figure this out, give a few examples, and perhaps this will be an important “tool” in your smart trading.
Most traders prefer to trade cryptocurrencies because of the high volatility and as a result of (potentially) high profit. But while there is an opportunity to make quick money there also is an option to lose easily, because the price of a volatile asset changes over a short period of time in both directions very dramatically. But financial markets are primarily classic assets such as stocks and bonds. And if you are a careful trader, you probably will not want to trade highly volatile assets, but rather prefer something with a more predictable and foreseeable movement of let’s say 1–2% per month. And despite the fact that an asset with an average growth of 10 to 20 per cent per year is a really good investment (especially compared to the negative deposit rate in many countries with stable economies), many investors simply do not want to wait a whole year to receive $150 from invested $1000. In this case, the so-called “leverage” maybe an interesting solution for them. However, this tool and the principle of how it works must be well understood before breaking into its use. Let’s have look at what benefits this tool can bring and how it can turn out to be dangerous.
Suppose you bought Tesla shares for $500 and sold a month later for $510. so you earned how much? right — $10 or 2 percent. Some brokerages will tell you that by investing the same $500 with them you can earn not $10 but $100, $200, or even $500. That means to double your equity within one month. You are offered a leverage of 1:50. That means, you need 50 times less money to get the same profit. (50 times less in comparison to $25 000, because 2% of the profit from it is $500). Sounds tempting and you agree. Yes? NO! In no way.
Because this is the completely wrong way to see understand “leverage”. It’s not that you need 50 times less investment to get the same profit, but it’s that your profit can be (potentially) 50 times higher with (ATTENTION) 50 times higher risk.
Let’s make a calculation example: with general conditions to make profit of $10 within a month you need to buy Tesla shares for $500. To make profit of $500 within a month you need to buy Tesla shares for $25 000. When you sell them in a month with a profit of 2% you will get $25 500. But what happens if the shares go down by 2%? Your loss will be 2% of $25 000 and it is also 500 dollars. In the end you will have 24500. Not nice of course, but for sure this can be compensated by another order or you can even wait out the temporary drawdown. But in the case of a leverage of 1:50 with a drawdown of 2%, you lose $500 which is 100% of your investment.
So how can such a colossal loss be counteracted? Some traders will suggest to counteract using the Stop-Loss function. In case of an unexpected downward movement, your order will close at the SL level you have set in advance. But more experienced traders know that the main losses with a large leverage happen between the trading sessions when a gap occurs. In this moments, the jump occurs suddenly upon opening and the Stop-Loss is triggered too late.
For this reason CopyRage allows its experienced users to trade with a small leverage but only inside the trading session (so called intraday leverage), in order to avoid unpleasant surprises with a gap. Responsable trading above everything.
There is also another way to minimize the risk, and it is probably obvious to you — do not use all the equity when opening a trade. Approach everything with appropriate analysis and with your strategy. After all, everyone wants to hit the jackpot and get rich in a second, and maybe someone succeeded, but believe me, they are few. In trading classic assets, the approach is important. Namely strategy and analysis. Behind all successful transactions, we see traders who have a store of knowledge, and how they reasonably use it in their business.
For successful trading, details are very important (however, as in any business). But we are talking about investing, saving and increasing your funds. Therefore, you must understand that such a tool as the “leverage” works! But all trading instruments will work for you if you understand the principle of their work. Otherwise, the losses will not be long in coming.
CopyRage team responsibly and diligently approaches the issue of financial literacy on the platform and will gladly provide technical support. But such basic concepts as: margin, leverage, volatility, gap, stop loss and many other concepts — it is important to understand the principle of work and why they are needed. This will allow you to feel confident in the financial market and possibly communicate with experienced traders at the same level.
Financial literacy is your main tool.
