Leverage Trading; Pros and Cons.

freepik

Hi friends, welcome back to this space, am happy to have you around once again...of course am here to dish out as usual, we would continue from where we stopped in the last discussion on leverage.

You can call this the part two of what have been discussed. And in this part , we will be considering the pros and cons of leverage. Leverage trading has a lot of benefit as we all know but it also has it disadvantages which we would be exploring shortly. Just follow me as I take you on this ride.

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Pros of leverage Trading

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• Amplifies Capital : Leverage trading can amplify or boost your capital. I have an example in my last post that shows how this works. I.e someone desires to trade an asset at the rate of $2000 but only has $200.

He can still make the deposit of $200 and use the leverage feature provided by his trading platform by adjusting the Leverage parameter to 10x.This automatically gives him the $2000 he needs for the trade
What just happened is that he amplified or boost his capital by means of Leverage.

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• Mitigating Against Low Volatility.

Volatility occurs in market and it can either be a fluctuation upward or downward. The state of low Volatility in the market can really be discouraging for traders.
Now here comes another interesting advantage leverage has to offer.

If you're to trade with your original capital in a low volatility cycle even with the slim price the market come with, you might not really make much because the market is already in a depressed state. But using leverage to heighten your capital in this low market state due to volatility can help you bring in the profit you desire .

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• It give you the "Premium" advantage.

What do I mean?...I mean with leverage, you can trade asset that are way beyond your original capital, I mean trading very expensive asset which on a good day the trader would not be able to afford...but with leverage, your platform or broker supplies you with the needful capital for that expensive asset you desire to trade and then boom you're already at it.

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• Amplifies Profit: Not only does leverage amplify trading capital, it also amplifies Profit. The logic behind it is, more capital, more profit. This is actually the reason why traders go for the leverage option in the first place...so that he can make more than what his original capital would give to him on a good day.

^freepik

If the 10x leverage used to derive $2000 in the example given earlier brings in a profit percentage of say 30%. He would be in profit of $600 instead of $60 which he would have gotten if he had used his original capital of $200. So we can see from here that it amplifies profit.

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Cons of Leverage Trading

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• Amplified Losses: Like I mentioned in my last post, the use of leverage is like weilding a two edged sword. It could bring you the fortune you yearn for and on the flip, it could also bring you down to zero because the loss involved is also amplified the same way the profit is.

You make loss in the same proportion as in profit. If your leverage parameter is set at 10x, profit will be time 10x, loss will equally be times 10x which could affect the trader so much to the extent of pushing him off the market.

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• Margin Call Risk: This is a call made by your broker or the trading platform you're using for the trade. He makes this call when you suffer huge loss which has already surpassed your margin.

^freepik

If your trading position is still open, he would call your attention to add to your margin in order to keep the trade open. But if it happens that you do not have enough margin to keep the trade running, he would be forced to close the trade on your behalf.

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• Forced liquidation: the last point led us to this point. In order to save the trader from further risk of loss, his broker would have to force him out of the trade usually just to minimize the risk of loosing more in that trade. He would close every position he has opened.

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Conclusion

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Leverage is an edge in trading when used by experienced trader. If you're still a novice, you're advice to avoid over leveraging, it could be your undoing as you've not mastered it use. Also do well to employ good risk management technique when trading with leverage.

There you go friends.I would love to wrap it up at this juncture. I want to believe you've gotten so much from this piece. As my usual custom is, I would always encourage that you DYOR to be sure of every financial step you would want to take as I won't be liable for any form of loss encountered by you.

Feel free to share with me your thoughts in the comment section. Thanks for your time once again. Gracias!

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^{Disclaimer: This post is made as an education and not investment advice. Digital asset prices are subject to change. All forms of crypto investment have a high risk. I am not a financial advisor, before jumping to any conclusions in this matter please do your own research and consult a financial advisor.}

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Regards
@lhorgic♥️

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