Brandon Wendell, CMT
Brandon Wendell
As many of my students know, I am an avid motorcyclist. What you may not know is that I also hold a certificate in motorcycle repair. As with my trading, I feel it is important to be able to fix things when they do not go well. If there is a problem with my bike, or it needs routine maintenance, I can fix it. When there is something wrong with my trading, I can diagnose the problem and adjust my plan to improve my trading. This can only happen with the proper education and practice.
In a motorcycle, power is transferred from the engine to the rear wheel. This is done through a set of gears. To make the smaller movements of the engine gears generate more power to move the wheel, smaller gears are linked up to larger ones. This is known as gearing.
There is a way to get more power from your money in the markets as well. This is also sometimes referred to as gearing. It is trading through the use of leverage. Leverage is additional buying power given to a trader or investor in order to increase their trading exposure. Simply put, it is extra buying power.
Do not confuse leverage with margin. Margin is a good faith deposit placed with your brokerage or clearing house in order to cover any losses that may occur in a trade. Margin is the money you commit to the broker in order to be able to use leverage. Just because you place a certain amount of margin with the broker for a trade, this does not mean that you can only lose that amount in the trade. You can lose more than that amount and even more than what is in your account if you do not manage your risk properly.
An example of margin and leverage would be selecting to trade Reliance futures instead of trading Reliance Industries stock. The current price as of this writing was Rs. 976.30. If you wanted to buy 500 shares of the stock, you would have to pay Rs 4,88,150. However, when looking at the Sharekhan website, you could buy one Reliance futures contract that has the same value and price movement as the shares for a margin of Rs 77,236.
In this example, you are using margin of Rs 77,236 to receive leverage of 6:1. Your buying power is increased six times what you are placing as a deposit!
Margin and leverage can be a great thing. You can increase your returns. If Reliance Industries moved in your favor by Rs 10 per share, you would profit Rs 5000. On the stock trade, this is a gain of about 1% (5000 / 4,88,150). But on the futures trade with leverage, this is a gain of 6.4% (5000 / 77,236).
There is also increased danger when trading with leverage. Your rewards increase but also so do your risks! If the trade had gone against you, you could have lost 6% of your capital very quickly. So treat leverage with respect.
To learn how to manage leverage and other risks in the market, become fully educated in how to trade those markets. Joining a course at Online Trading Academy is a great way to start.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD eyes nine-day EMA barrier after rebounding from 1.1600
EUR/USD gains ground after registering modest losses in the previous session, trading around 1.1620 during the Asian hours on Friday. The technical analysis of the daily chart suggests an ongoing bearish bias as the pair remains within the descending channel pattern.
GBP/USD: Pound Sterling ticks up against US Dollar in countdown to US NFP
The Pound Sterling trades marginally higher to near 1.3365 against the US Dollar during the Asian trading session on Friday. The GBP/USD pair edges up as the US Dollar ticks down ahead of the United States Nonfarm Payrolls data for February, which will be published at 13:30 GMT.
USD/JPY struggles near 157.50, eyes turn to US NFP
USD/JPY edges lower to near 157.50 in the Asian session on Friday after posting modest gains in the previous session. Broad US Dollar weakness, Japanese FX intervention risks and a risk-off market mood undermine the major, despite uncertainty over the BoJ interest rate hikes. All eyes now remain on the US Nonfarm Payrolls data.
Editors’ Picks
EUR/USD eyes nine-day EMA barrier after rebounding from 1.1600
EUR/USD gains ground after registering modest losses in the previous session, trading around 1.1620 during the Asian hours on Friday. The technical analysis of the daily chart suggests an ongoing bearish bias as the pair remains within the descending channel pattern.
GBP/USD: Pound Sterling ticks up against US Dollar in countdown to US NFP
The Pound Sterling trades marginally higher to near 1.3365 against the US Dollar during the Asian trading session on Friday. The GBP/USD pair edges up as the US Dollar ticks down ahead of the United States Nonfarm Payrolls data for February, which will be published at 13:30 GMT.
Gold awaits US Nonfarm Payrolls for a clear directional impetus
Gold rebounds above $5,100 early Friday after testing the $5,050 level amid global sell-off. The US Dollar pulls back as profit-taking creeps in ahead of US labor data. For February. 21-day SMA holds amid bullish RSI; a daily closing above 61.8% Fibo is critical for Gold buyers.
Top Crypto Gainers: Lombard, Humanity Protocol, OKB rally on US Fed’s tokenized securities clarity, NYSE investment
Lombard, Humanity Protocol, and OKB rally over the last 24 hours, securing the top-gainer spots in the early Asian session. The US Federal Reserve issued clarity on tokenized securities, which expands its utility and reduces regulatory friction with US banks, driving the Real-World Assets tokenization crypto projects.
The market compass is pointing at a barrel of Oil
The Asian open is arriving with equities leaning the wrong way, and the reason is not complicated. The market’s compass needle has snapped firmly toward crude. In this tape, oil is not just another input price; it is the gravitational center around which every asset class is orbiting.
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