Monday, June 22, 2009

Leverage for beginners

Liquid Trader commented on my last post and his observation motivated me to write something about leverage for beginners: Should they use it, and, if they should, how it is to be used? 

What is leverage? According to Wikipedia: “In finance, gearing is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. Deleveraging is the action of reducing borrowings.” 

As an example: The most common way of leverage is buying investment property. Simply, you borrow money from the bank to buy house; you pay your bond and all capital appreciation is for your benefit.

Leverage is widely used in trading and stock investing: Futures, options, warrants (widely used options in South Africa), contracts for difference, and the mother of all - FOREX. Many beginners are attracted to possibility of putting small deposit and having big exposure. In Forex trading normal leverage is 1:100, but you could find one with 1:200, 1:500, and even 1:1000. Futures are around 1:10 and options, at least in South Africa, around 1:5. 

Should one start with leverage and where? From my personal experience I should say yes. Please note, I never traded any stock in my life, as I’ve started from day one with warrants. Of course, these were with small gearing of 1:3 at maximum. As I’ve learned ways of using leverage and as that learning process lasted 2-3 years, I moved into trading waves with gearing that could go as far as 1:100. Currently, I trade ALSI futures contracts and gearing there is in the region of 1:10. For me, this was natural way of following steps in order to get where I am now. 

Leverage can be very dangerous if one does not know how to use it. I believe it is extremely painful to watch account going dry very fast, as the higher the leverage, the faster money disappears in front of your eyes. 

On the other hand, leverage is very powerful tool to maximize your profits, and such tool comes with price tag.

I would recommend all readers of this blog to first find out if future trading is for them. If yes, then entries and exits should be paper-traded for at least 3-6 months, in order to build confidence in system that is traded. Only after that, one should start trading it and, at the beginning, it should be done with smallest possible leverage. Maximum that I would recommend, for first year or two, is leverage of 1:3. As time passes-by one could increase leverage, but be cautioned and even afraid of going mad with it. Use leverage responsibly and you will reap the benefits.

This is marathon run. It is not sprint. It is important to be here in 5 or 10 years from now. If you manage, you will place yourself in category of very few. 

Trade with trend.


Liquid Trader said...

Dankie - some good points... beginners TAKE HEED

Alsi Trader said...

Liquid Trader

Thank you for insights and comments

Anonymous said...

ӏ all thе timе used to гead parаgгаph in news papers but now аs Ӏ
аm a useг of internet ѕo from nοw I am usіng net for articles οr reνiеwѕ, thanks to web.

Му webρagе :: binary trading options

ninest123 said...

chanel handbags, gucci outlet, michael kors, louboutin outlet, louis vuitton outlet, oakley sunglasses, prada outlet, oakley sunglasses, nike outlet, ugg boots, uggs on sale, ray ban sunglasses, longchamp pas cher, oakley sunglasses, nike air max, louboutin shoes, burberry, louboutin, polo ralph lauren outlet, longchamp, louboutin pas cher, longchamp outlet, louis vuitton, ralph lauren pas cher, tiffany and co, air jordan pas cher, jordan shoes, tiffany jewelry, nike air max, kate spade outlet, christian louboutin outlet, louis vuitton outlet, replica watches, prada handbags, cheap oakley sunglasses, louis vuitton, ray ban sunglasses, ugg boots, longchamp outlet, sac longchamp, oakley sunglasses, polo ralph lauren outlet, nike free, nike free, tory burch outlet, replica watches, air max, louis vuitton, nike roshe run, ray ban sunglasses

ninest123 said...

michael kors outlet, kate spade handbags, true religion outlet, nike air max, coach outlet, ralph lauren uk, timberland, michael kors outlet, michael kors, hollister pas cher, michael kors, air force, michael kors outlet, nike roshe, tn pas cher, north face, coach purses, nike free run uk, hogan, ray ban uk, north face, vans pas cher, mulberry, michael kors outlet, sac guess, ugg boots, new balance pas cher, michael kors, nike air max, true religion jeans, hermes, replica handbags, true religion jeans, true religion jeans, michael kors outlet, vanessa bruno, nike blazer, hollister, burberry outlet online, coach outlet, michael kors, burberry, nike air max, lululemon, converse pas cher, lacoste pas cher, ugg boots, abercrombie and fitch, oakley pas cher, ray ban pas cher

ninest123 said...

herve leger, converse outlet, p90x workout, ralph lauren, mcm handbags, nike air max, new balance, hollister, gucci, birkin bag, chi flat iron, louboutin, ferragamo shoes, oakley, ray ban, hollister, nfl jerseys, converse, asics running shoes, hollister, ghd, longchamp, wedding dresses, soccer jerseys, iphone cases, insanity workout, north face outlet, vans shoes, giuseppe zanotti, baseball bats, abercrombie and fitch, reebok shoes, vans, nike trainers, nike huarache, north face outlet, mac cosmetics, valentino shoes, nike roshe, instyler, bottega veneta, mont blanc, soccer shoes, nike air max, jimmy choo shoes, timberland boots, lululemon, babyliss, celine handbags, beats by dre

ninest123 said...

montre pas cher, ugg pas cher, moncler, louis vuitton, bottes ugg, coach outlet, canada goose, thomas sabo, pandora jewelry, barbour, links of london, toms shoes, moncler, moncler, replica watches, juicy couture outlet, swarovski crystal, juicy couture outlet, canada goose, pandora charms, canada goose outlet, wedding dresses, pandora jewelry, louis vuitton, marc jacobs, lancel, canada goose outlet, canada goose, louis vuitton, canada goose, ugg,uggs,uggs canada, moncler, moncler, moncler outlet, ugg,ugg australia,ugg italia, pandora charms, canada goose uk, barbour jackets, karen millen, swarovski, doudoune canada goose, louis vuitton, hollister, sac louis vuitton pas cher, moncler, moncler, supra shoes, ugg boots uk

alitergalen said...

Money Managers are responsible for managing the securities portfolio of multiple clients on a daily basis.