Precious metals trading provides a powerful tool called leverage, but it must be used wisely to avoid significant risks. Used properly, leverage enables you to achieve great profits, but used improperly it can also result in huge losses. If you want to succeed with precious metal trading, then you need to understand how leverage works and what are the best practices to use it.
Traders use leverage to control a larger position in the market with modest amounts of capital. In other words, it lets you take out a loan from a broker to magnify the size of your trades. For example, with a 10:1 leverage ratio, you can control a position that is ten times larger than your initial investment. That being said, although you can make more money while using this kind of system, you can lose equally. Leverage can have a big impact in precious metals trading where prices are volatile.
An important aspect when it comes to leveraging effectively is understanding the risk involved. The higher your leverage, the greater the profit potential and the losses. That’s why it’s so important to take your time and evaluate your risk tolerance before trading precious metals using leverage. If you are new to trading and you have low risk tolerance it is sensible to select a lower leverage ratio. You can increase your leverage, but only after you get more experienced and comfortable with the market and as always, with caution.
Using leverage in trading of precious metals requires risk management. One of the best ways to limit potential losses is to set stop loss orders. Stop loss order is that it closes your position automatically when the price moves against you by a specific number. Setting a stop loss will keep you safe and prevent one trade from taking out all of your money. Plus, you want to diversify your trades across different assets so that any given trade doesn’t affect your entire portfolio too much.
Additionally, traders should use leverage moderately and not over do it. It’s tempting to take big positions with high leverage but that too exposes you to unnecessary risk. Instead, use leverage to make your trading strategy better, but don’t rely on it to make majority of your profits. You can lower the risk of precious metals trading by making well thought out trades while managing your leverage.
The cost to borrow money from your broker, while it’s an important factor to consider when using leverage, is just as significant. The majority of the brokers charge interest on leveraged positions and the interests add up over time. These costs must be taken into account when determining potential profits and losses, if they are to eat into your returns. Likewise, if you take leveraged positions, it’s usually with a margin and this means that for you to keep the trades open you will be required to maintain a certain balance in your account.
If you use leverage mindfully then using leverage in precious metal trading can be a valuable tool. By grasping the true nature of leverage and how to best use it, while limiting the exposure to risk that is possible through leverage, traders increase their chances of making profits using leverage and limiting losses.
