Using Leverage Professionally in CFD Trading

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Using Leverage Professionally in CFD Trading

Contracts for Difference (CFDs) are popular, especially in Europe, mainly due to leverage – the ability to deposit a small amount as collateral and borrow money from the broker in order to trade larger position sizes. Because some people think leverage is 100% and some generally exaggerate when using, we need to clarify a few things, so if you’re just getting started with CFD trading, you’ll know how to use it responsibly.

#1 Leverage in the context of risk management

“What is the most appropriate leverage level?” you may ask, thinking that there’s a certain threshold not to be exceeded. In reality, leverage on its own is irrelevant. You must think from a risk management point of view, meaning you must consider a few variables, not just the leverage. If you risk losing your entire account when the market moves in the opposite, then you clearly must take some actions.

You must adjust your position size and use risk diversification methods in order to not get wiped out by a single losing trade. Risk management is not just about leverage. It’s about position sizing, the risk per trade (how much in % terms you will lose if you’re wrong), your accuracy (meaning the percentage of winning trades), and last but not least, the risk/reward ratio. All these variables will help you calculate your risk of ruin or the probability of all your money.

#2 Reducing the leverage once your account grows

One of the common mistakes around retail traders is to increase their risk and exposure after a winning period. They get overconfident about their trading abilities and take higher risks, only to end will less money than they originally had. Trading is like a marathon and there’s no easy way out of it. Reducing the leverage as your account grows will show that you’re not only treating trading responsibly but will also show great emotional control.

We can’t suggest any particular level for the leverage. Some experts say that leverage higher than 1:10 means you’re gambling, and some consider 1:100 as the maximum level. As we’ve seen previously, you should put leverage into a greater context, not isolate it aside from other important risk parameters.

The bottom line is that risk management is a trading skill and leverage is one of the key components of it. If you can’t afford to invest a lot of money, then obviously you’ll have to use higher leverage at the beginning. Make sure, however, to stick to strict rules of risk management, so the risk won’t get out of control.

Using leverage like a professional

Professionally Using Leverage

One of the most important aspects of trading to grasp is the proper, and professional use of leverage. The use of leverage is arguably the most important aspect of risk management and proper risk management is the top priority of all professional traders.

Managing risk is going to be the single most important factor in your success or otherwise as a Forex trader. You must pay attention to this lesson, as this may be the one factor that is hindering your progress in the markets, as the improper use of leverage will make long term success almost impossible to achieve in the Forex market.

In contrast, the proper use of leverage will prevent you from destroying your account, preserve your capital as a trader, and make you an attractive trader for high net worth individuals to invest in.

Leverage is simply a way of trading with more money than you actually have in your account. Now using leverage can maximize gains, however it can also increase losses too. This is one of the reasons that the Financial Conduct Authority in the UK would like to reduce the amount of leverage accessible to traders.

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Too many people have lost their entire trading accounts by the mis-use of leverage. In June 2020 it emerged that one broker had accidentally allowed a trader to open a $5 billion dollar position. The trader, who thought he was trading a demo account, was actually placing $1 billion worth of live orders for US and European equity futures.

The trader ended up with a profit of $10 million dollars, but his initial deposit with the broker had only been $20K. He was using leverage over 200 thousand times above his initial deposit. When you consider that the broker in question only made a profit of $9.6 million last year you can see the enormous risk that leverage can pose. So, the first step in using leverage is to understand exactly what it is.

What is leverage?

The best way to understand leverage is to think of your trade size (how much you are trading with) vs your account size (how much you have in your account). So, for example, lets say that you have 10000 USD in your account.

If you buy 1 standard mini lot (0.10) – you are now considered to be trading unleveraged. This is because your trade size is equivalent to the amount of money in your account. Your position size is one mini lot, 10000USD, and your account size is 10000USD.

They are the same. In the pictures below you will see an order opened on an MT4 account . The trade size is 1 mini lot or 0.10. A position opened in this scenario would be for a trader not using any leverage with a 10000USD account.

If that trader, with the same account size of 10000 USD, then went on to open a second mini lot position of 0.10, then that trader would be using leverage of 2:1 This means that they are trading with double the trade size in relation to their account.

Their trade size would be 20000 USD , yet their account size is 10000USD. For each subsequent 0.1 trade position the trader opens, the higher amount of leverage they will be using in their account: 3:1, 4:1, 5:1 and so on.

How to use leverage professionally

Now just because you can use leverage it does not mean that you should. Professional traders, working for large institutional banks, brokers and funds use very low levels of leverage. In fact, as a general rule, for working out their trade size they will use unleveraged positions.

As explained above that will mean that their trade size matches their account size. So, a trader, operating a $1 million USD account would only use 10 standard lots as their normal, unleveraged position. At first, it may seem strange that a professional trader would not utilize these high levels of leverage.

So, let us move on to consider some of the key reasons why professional traders are so cautious in using leverage.

The benefits of using leverage professionally

Attract high net worth clients

The first benefit is that it allows a professional trader to attract and retain high net worth individuals and accounts. This is obvious when you think about it. Imagine that you have been entrusted with a $200 million account to trade with. Now, imagine, that through using leverage you have a losing trade that loses 10% of your account.

Now, let’s say that for the next two trades you lose a further 10% of your $200 million account. Let’s say those three losing trades happened in one week. Three losing trades in a row is not an unusual occurrence for any professional trader. It happens. Now, that trader would have to tell their employer and their client that they have lost over $40 million in one week. Enduring that kind of loss is an unbearable mental toll on both the trader and the client.

A professional trader who traded in this way would be removed from their post and clients of high net worth would not be prepared to risk so much of their money in this way. So, when you stop using leverage you are showing yourself to be a trustworthy trader who can manage risk in an acceptable way. Say, in the example above, that instead of risking 20% of their account , the trader had not used leverage and only risked 0.60% of their account per trade. Their total loss would only then have been 1.8%.

That is a an acceptable loss for three losing trades in a row, especially when the winning trades inevitably come along again. If you aspire to be a Forex trader, showing that you can manage accounts in a responsible way is crucial in attracting high net worth investors and will be a key factor in your success. If you aspire to become an online Forex trader, then managing your risk is a key factor you need to master.

500investments Review

500investments

Details

Broker 500investments
Website URL https://www.500investments.com/
Founded 2020
Headquarters Beachmont Business Centre, Suite 25, Kingstown Saint Vincent and the Grenadines
Support Number +442039368364
Support Types phone , email
Languages english , Deutsch , Spanish , Netherlands
Trading Platform web-based platform | mobile platform
Minimum 1st Deposit $250
Minimum Account Size $250
Minimum Trade Amount 0.01
Maximum Trade Amount different for each asset class
Bonus Welcome Bonus
Leverage up to 1:400
Spread fixed/ floating
Free Demo Account
Regulation Not regulated
Fees
Commissions
Account Types basic , silver , gold , platinum , diamond
Deposit Methods credit/debit card , wire transfer , BPay
Withdrawal Methods credit/debit card , wire transfer , BPay
Number of Assets 1,000+
Types of Assets forex, stocks, indices, commodities, cryptocurrencies
US Traders Allowed
Mobile Trading
Tablet Trading
Overall Score

Currently providing access to 1,000+ CFD instruments, 500investments.com is a brokerage company owned and operated by Cabsy Holdings Ltd. Forex, stocks, indices, commodities, and cryptocurrencies are the main asset classes available for trading and at the same time, there is a comprehensive offer, with plenty of trading features.

Trading Platforms

Starting with the trading software, 500investments relied mainly on a web-based solution developed in-house. The Web Trading Platform is compatible with any type of device, as long as it carries a modern web browser. Despite being a platform developed by the company, it comes with most of the tools integrated in any other platform (multiple chart types, drawing tools, price indicators, time frames, etc.) and in addition, there are a few personalized features (social trading, price alerts, reports, popularity bar, etc.).

In order to meet the demands of the present, there’s also the TraderSoft mobile platform, compatible with any Android or iOS device. Traders can have the freedom and flexibility to engage with the market at any point, no matter their physical location, directly from their mobile phone. The main quality of TraderSoft is the ability to downscale perfectly to smaller mobile screens without any loss of functionality or performance.

Account Types

Options are diverse when it comes to account types since 500investments had designed an offer for any type of traders. Those who can’t afford to invest a lot of money can open a basic account with as little as $250. For that minimum deposit, they get negative equity protection, industry-leading entry prices, free access to the trading academy, and a dedicated account manager, among others.

Silver, gold, platinum, and diamond account holders will get to enjoy many more features, but the initial deposit required is also much bigger. Access to a senior account manager, VIP webinars & seminars, as well as stock packages and discounts in bonus required in traders’ points.

Instruments

With 500investments, traders can get to trade forex, stocks, indices, commodities, and cryptocurrency-based CFDs, with leverage as high as 1:400 and competitive spreads + pricing. There are more than 1,000 different contracts available via the broker and more could be pending.

In order to get access to them, clients can make deposits via credit/debit cards, wire transfers, and BPay at any time and withdraw money using the same methods.

Promotions

At the time of writing, there are three different bonus types available at 500investments. Clients can get to enjoy a birthday bonus, pending bonus, or “one trade on us” bonus. However, all traders interested to apply for a bonus must carefully read all terms and conditions, since there are a lot of requirements to be met.

Pros and Cons

  • A variety of contracts based on forex, stocks, indices, commodities, and crypto.
  • High leverage level.
  • Proprietary mobile platform.
  • No mention regarding regulation.
  • No desktop trading software.
  • Limited information about the operating company.

Summary

Based on the aspects described in our review, we can conclude that 500investments is a CFD trading solution for traders wanting to trade with off-shore brokerage companies. There are plenty of instruments to trade, with competitive features and many trading tools available.

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