TRADING

Do this one thing, and treading with leverage won’t be dangerous

Liquidation alert! Your position has been liquidated. Thank you for your sacrifice!

Click baity, I know. But it’s also the truth. Let me make it up to you by being short and to the point.

Here’s the rule:

Only keep up to 10% of your whole trading/investing portfolio on the leveraged trading account.

If you have 100,000 USD, only keep 10,000 USD in your leveraged trading account. If you have 10,000 USD, only keep 1,000 USD, and so on. You get the picture. But, Sir — I was told I can make more money if I use leverage! Sure, you could. But the odds do not favor such an approach. Most of us have received dozens of liquidation e-mails in our mailbox.

Why is that? Do you such so much as a trader?

Possibly, but it has a lot more to do with:

1. The temptation to misuse leverage and load up on position sizes.
2. The danger of being liquidated (losing everything) even with relatively shallow volatility in the market.

If you risk 10,000 USD and buy a position the size of a 10x leveraged position, so 100,000 USD, it would take a dump of less than 10% in price for you to lose everything! And, friends, 10% is nothing.

Here are a few hints for you:

• Don’t use leverage if you don’t manage risk on every trade.
• Don’t use leverage if you find it difficult to close trades in the red and have a habit of riding the price down. (can’t take a controlled loss)
• Don’t use leverage if you want to increase your size by 100x because you only have a small account.

Want to hear about my first encounter with leverage?

Sure you do. We all like reading about other people’s miseries and losses in the market. I was a successful trader then, but I only ever traded spot. No futures, I bought and sold cryptocurrencies on exchanges. Then I noticed people bragging about making it big on Bitmex, and I wanted a piece of the pie!

Here’s how that went.

• I employed my usual trading strategy, setting up low bids to catch any dump.
• I got a few great entries, or so I thought, so I added to my position, absolutely convinced the price cannot go lower (I bought the bottom).
• Happy that I now had a 10x position, I went to the movies with my girlfriend, counting what I’d do with my profits afterward.
• During that movie, I got the much-dreaded liquidation emails. Apparently, the price can go lower in one freaking move.
• I had lost my whole account in less than a day. A few hours, in fact. Everything!

Luckily, I was cautious enough to only put about 10% of my whole portfolio into that account for experimentation. It was an expensive lesson, but it would have been devastating had I moved my entire trading account to Bitmex at the time. I was horrible at cutting my losers and had near-zero risk management skills. I wasn’t ready, is what I’m saying, so the market took my money and didn’t even say “thank you!”

Always remember that anything can happen in the markets at any time.

In that instance, I had bought a 30–40% dump. I thought that was more than safe enough. It had never gone deeper in such a short time. Until it did, and I lost the account.

How could I have avoided this liquidation?

• By managing risk more diligently and having a stop-loss order in place.
• By lowering my position size to one that could withstand more volatility.
• By not being greedy.

Luckily, that was the last time I got a liquidation email and lost the whole leveraged trading account, right? Wrong!

Having the option of using leverage — borrowing money — is like an ever-present Siren, seducing you with temptation, leading you to danger. And you know what? To hell with it. Play and have fun. Just make sure you limit the maximum amount of money you can lose if and when something goes wrong!

So, what’s the correct use of leverage in trading, I hear you asking?

Minimizing third-party risk! Once you understand that, you’re golden. I haven’t been liquidated in a few years now. In fact, I can’t be. I just won’t allow it. I either use a stop loss or lower my size appropriately.

If you want to play with leverage, start small and build up. Remember — the amount of applied leverage doesn’t matter, the size of your position does. Learn how to calculate the right position size HERE.

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*New to trading? Start here and learn about managing risk!