Trading the capital markets requires a good broker, good trading strategies, excellent trading tools and the ability to leverage your trades. One of the most important tools required is your ability to understand and manage your risk. The risks you will take not only include making sure that the underlying asset you trade moves in the direction you expect, it also includes managing your positions, and making sure that you have the optimal size when the market moves your way.
The first step your trading process is to define how much you are willing to lose to generate the potential gain you are looking to achieve. You should try to avoid trading on gut instinct without a well thought out plan. Start by following a few trading instruments that are interesting. Once you have an idea of what you plan to trade, you can develop a trading strategy. Your strategy should be driven by two concepts, where should you enter and where will you exit. Your potential gain should justify the amount that you are willing to lose. So, unless you have a strategy that win nearly every time, you would want to make sure that your potential gains are larger than your expected loss.
A Winning Trading Strategy
In addition to understanding that you need a winning strategy, you need to manage the amount that you trade on each position. The key to successful trading is either winning more than you lose or winning more on successful position than you lose on unsuccessful trades.
For example, if you trade 10-trades and win on 7 of those trade and the amount you risk equals the amount you gain, then you will have made money. Alternatively, you might design a strategy where you might lose more than you win, but the winning trades generate more than the losing trades lose. On the same 10-trades if you win only 3 but make 3-times as much on winning trades as you lose on unsuccessful trades (3 * $30 = $90 compared to 7 * $10 = $70) you will have a successful trading strategy.
There are a few ways that you can generate 3-times as much on winning trades as you can lose on unsuccessful trades. One way to accomplish this is to set your stop loss at 33% of your take profit level. So, if you plan to make $30 on a trade, you will stop loss at $10.
To enhance your gain, you can use leverage. Leverage is created through a margin account. This is an account that allow you to increase the value of the assets that you are trading. So instead of purchasing a share of a stock that would cost $200, you can use leverage and only post $20 to control a stock that is
The amounts of leverage you can use ranges from broker to broker and will differ depending the type of instrument you are trading. The more volatile the financial instrument the lower the leverage that is generally offered by your broker. The forex markets generally offer robust levels of leverage. Some broker even offer leverage up to 400-1. This means that if you post in your margin account $100 you broker will allow you to take a position that is $40,000.
How to Use Leverage
When you trade with leverage you can increase your position size and potentially generate gains. If a trade is moving your way, and you have a strategy that allows you to add to your position, you can generate potential gains where the gains exceed the losses by 3 to 1.
The potential returns (profits ) you can generate with leverage are substantial. For example, if you use leverage of 400 to 1 on $100 and generate a return of 0.25%, your return will be $100 (0.0025 * $40,000 = $100) or 100% return. Remember the sword cuts both ways. When you use substantial leverage, you can also lose a lot of money with a small move in the market.
Additionally, there is no free lunch. Your broker uses a system that makes sure you will not lose more money in your account on any trade, through an automatic stop loss procedure. When the value of your account reaches a minimum threshold, your broker will stop you out of your existing positions. There is a minimum that you need to have in your account to trade with leverage. While using leverage can substantially enhance your potential returns and allow you to generate a trading strategy that is successful, you need to understand the nuances of how to trade with leverage and the workings of your margin.
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