Dear trader, welcome back to our blog!
Today, we introduce you to a powerful tool that, when used correctly, can significantly increase your profits. But be careful, because it is a double-edged sword.
Many cases can be mentioned where this tool was not used correctly and this led to complete capital losses for many investors due to not knowing how to use it wisely.
What is leverage?
It is a mechanism that allows you to access a larger amount of assets than you can buy with your current capital. It allows you to enter into larger trades (functioning as a loan) by paying only a fraction of the total required value.
Who grants the loan? The broker you trade with. It is a commitment to repay later, with interest, the money you are using to open the position you want.
How does leverage work in trading?
Let's take an example:
John has $1,000 in his trading account and wants to buy 10 Bitcoin futures contracts. The broker sets the value of each contract at $1,000, so the total trade
would be $10,000.
Without leverage, John cannot open this position because he does not have enough capital. However, if he uses a leverage of 10:1, he would only have to establish a margin of $1,000. The broker provides the remaining $9,000.
If the price of Bitcoin goes up, John would earn a profit of $1,000 for each contract he bought. In total, his profit would be $10,000. On the other hand, if the price of Bitcoin goes down, John would assume a loss of $1,000 for each contract he bought. In this case, his loss would be $10,000.
So let's say that both John and you need to make sure you have your feet firmly on the ground before launching into investing with this method.
The real scenario: what using this technique entails
Multiply your profits: As long as the market moves in your favor, your profits are likely to be much higher when using the tool.
Access assets with high prices: Even as a beginner, you can buy assets of great value in the market, an ideal situation especially when you do not have too much capital.
Greater risks: The more you risk, the greater the possibility of loss. If the market moves against your predictions, your losses will be much greater than they would be without using leverage.
Requires sufficient practice and experience: Get good advice from experts to understand well. This method has its own process for each asset, in each market. Discipline and intelligence are essential.
How can I become a professional in this technique?
As you can imagine, there are many ways to professionalize this technique. But, here are some tips:
Take care of your first investments: It is not necessary to use high leverage to generate profits. Start with low-value leverage and see how it goes. Based on your results, gradually increase as you gain experience and compare your journey with your community. You should avoid using leverage in the face of uncertainty or little chance of winning in a particular position.
Apply stop-loss: It is an essential tool to limit your losses. It is an order that automatically closes your position if the price reaches a predetermined level that you set in advance. This is an excellent risk management measure in investments, in this case trading.
If you want to win big, study a lot: You need to be sure of what you are doing, understanding all the factors at play.
As we always say, building your own criteria, studying and developing techniques and resources that allow you to flow better with the market is the first step. The challenge is not just to reach the summit, but to know how to take advantage of the shortcuts along the way and always keep profitability on our side.
We wish you all the best in your trades this week, have a great week!
For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez