A Quick Guide to Leveraged Trading


Let’s Have a Quick Chat about Leveraged Trading

One of main problems with spread betting, CFD and forex is leverage. Helping yourself is actually very simple, it boils down to a reigning in of risk appetite.

Spread betting and CFD trading are leveraged and for many traders it is not actually their win:loss ratio that hurts them, but the level of leverage they take on – and usually inadvertently.

Let me give you an example – say you have £5,000 in an account and like the look of Lonmin which is trading at £10 a share.

Now, with margin requirements of as little as 3% at various firms you might be tempted to buy say £10 per point which will cost you an initial margin of £300.

You promptly do this and sit back, looking forward to making a few hundred pounds on your £300 initial investment…

You are in fact controlling £10,000 of stock and the volatility of a stock like Lonmin is such that it will easily move 2-5% on a given a day.

Get your entry wrong and see a 20p move against you (excluding the spread) and you are immediately ‘on margin’ – a place you never want to be, trust me.

Instead of leveraging yourself to the hilt, take a more measured and risk controlled approach and always calculate what the underlying ‘gross’ exposure is (this is also called the ‘notional value’). In this instance my notional value was £10,000.

This gives you a true and clearer reflection of the risk you are taking.

Remember You Are Borrowing From the Spread Betting Company

When you spread bet you are in effect borrowing money from the spread betting company.

As above, with a deposit of £300 you are borrowing £10,000 and using that to trade on your chosen market.

Note this is why the overnight financing fees often seem high. You are paying interest on the £10,000 you borrowed.

Sea of Green?My Trading Screen is Never a Sea of Green

Personal Leverage Guidelines

My own personal rule of thumb when it comes to stocks is as follows:

  • arrow_forwardFTSE 350 Stocks – margin yourself at 30%; you will be surprised just how much so called ‘blue chips’ can move.
  • arrow_forwardFTSE Small Caps – margin yourself at 50%, and even 70% when it comes to oil explorers and technology stocks. Moves of 30, 40 and 50% a day are not uncommon.
  • arrow_forwardFTSE AIM Stocks – margin yourself at 75% – this is the one area of the marketplace where traders really can get ‘wiped out’ particularly if averaging into a losing position. Always, always under leverage yourself here.
  • arrow_forwardForex – risk no more than 3% of your account on any one move and NEVER, EVER move your stop.If you do get stopped out then leave the position alone for a few days before you are tempted back in – you will most likely only over trade and lose more money if you do rush back in.The 3% move on your account should equate to at least a 100 pip move allowing you some latitude on your entry and intra-day ‘noise’, and so position size accordingly.
  • arrow_forwardStock Market Indices – as with currencies, risk no more than 3% of your capital on any one trade and similarly position size accordingly with the 3% move on your account equating to at least 100 index points so as not to be ‘whip-sawed’ out.

Adhere to the above and you might, just might, extend the life of your account and address the high probability of getting a number of trades wrong in a row without pressuring yourself with the enemy of all traders – the dreaded margin call!Remember: Spread betting, CFDs and forex trading carry a high level of risk. You can lose more than your initial investment. These products are not suitable for all investors. Only speculate with money that you can afford to lose. Make sure you fully understand the risks involved and seek independent financial advice where necessary.