Top 5 Advantages of Leverage Trading

Leverage Trading is used to increase the trader’s trading capital. Many brokers offer it nowadays as leverage is not only for huge financial institutions but also for retail traders and small investors. Leverage is like borrowing money from your broker so you can gain greater market exposure. But just like how it increases potential gains, it also increases the risks. It is important to understand not just the benefits of leverage but also the risks that are involved.

What is Leverage Trading?

Trading in leverage is a tool that is highly beneficial among CFD traders. For investors, it maximizes the returns, grows capital, and increases the trader’s exposure to his preferred market. However, it is also important to note that although trading in leverage is beneficial for traders, it can also work against you. It is true that you magnify your earnings but it can also magnify your losses. When prices move against you and you don’t have a proper risk management plan then you will most likely blow your account.

Trading with leverage lets you acquire a large position just by paying part of that amount. This ‘small amount’ or deposit is called margin. Depending on the regulatory conditions of the broker, the margin amount and the leverage amount will be decided.

Advantages and Disadvantages of Leverage Trading

Increases the Capital

The first and the most obvious advantage of trading in leverage is that it boosts the capital that you are allowed to invest in the market. For example, the leverage is 100:1. To be able to control the $100,000 as your trading capital, you have to pay the margin which is $1,000. This ensures that you get a favorable position in the market without paying the actual amount of the position.

Loan Without Paying for Interest

Most loans acquired nowadays require the borrower to pay huge interest rates. But with leverage trading, you won’t be paying for the interest. You can also use it in any way you want it. As long as you can benefit from the market, you will not lose the initial deposit you paid.

Magnified Profits

As mentioned above, leverage allows magnified profits and this excites a lot of traders, especially the new ones. You can earn profits through the trade position and not based on the margin that you invested in. This ensures that traders can gain substantial profit just for paying a small amount of capital.

Mitigates Against Lower Volatility

Usually the prices in the market change according to the cycles of low and high volatility. Most traders like to trade from high volatile markets because they make money out of price movements. Accordingly, when volatility is low, it becomes frustrating for traders due to the little movement in the market.

Chance to Trade in Premium Markets

Most small-time investors, they may not have the chance to trade in premium markets because of low capital. But when you trade with leverage, premium markets that are considered prestigious and hard to enter become open to retail traders. This gives a small retail investor a chance to acquire greater trading opportunities.

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