What is Leverage Trading?
Leverage trading is a system that allows the trader to open positions much larger than his own capital. The trader needs only to invest a certain percentage of the position. The ratio between the position value and the investment needed is referred by the name of Leverage, and Margin is the percentage of the position needed.
Terms related to Leverage Trading
The amount an investor has available (including leverage) to buy securities is greater than his or her account balance.
A fundamental indicator that the investor should always keep in mind. It represents the ratio of the net account balance in relation to the leveraged amount, the money that will have to be paid out.
If the coverage or risk ratio falls below the minimum requirement to maintain the leveraged position, BBVA Trader will issue a margin call, a warning to the investor that his or her excessive exposure represents a risk that exceeds levels permitted by the bank.
This occurs once BBVA has sent the corresponding warnings about exposure levels and starts to cancel all the client’s pending orders. Orders placed in the market but not executed yet. If the leveraged amount has still not been covered 100 percent after canceling these orders, the investor’s stock positions in the portfolio will be automatically closed in a certain sequence. To schedule the closing of these positions, the system uses an approach called LIFO (last in, first out). Starting with the most recently purchased, stocks are sold until the coverage ratio has reached an acceptable level. It is important to understand that this automatic closing of positions by BBVA should not be deemed to be a stop-loss order or market-with-protection order for the investor. The investor himself must manage his or her market risks. So, closing positions before the coverage ratio reaches the minimum required level.
Why trade with Leverage?
There are several advantages to trading with leverage:
Minimizes the capital the traders invest. Instead of paying the full price for an instrument, the trader can pay only a small portion of it.
Let’s see an example: if a position’s value at the time of opening is $3,000, instead of paying the full amount, he can employ leverage of 400:1. This means that every $400 in actual value he will be requested to invest $1 of his own capital; meaning that for this position he will need $7.5 to open it.
Also, some instruments are relatively cheap, meaning almost every trader can trade them easily. In another way, some are considered more valuable and based on their traded frequency and other factors are more costly. Instead of investing large amounts in order to take part in their market, it is possible to use leverage and enjoy the shifts in the price of valuable instruments.
Although leverage trading gives the advantage to traders to invest less capital, it also has a fail risk. As it is possible to gain much further than his initial investment, losses can happen in the same way. It is crucial to keep track of open positions and apply stop loss and other market orders in order to prevent large scale losses. For this reason no matter how much of an expert you are in Leverage trading. It is always best to use a trustworthy service provider like Phemex in order to make your trading safer and more accurate.
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