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 holds near 1.1900 ahead of US data
EUR/USD struggles to build on Monday's gains and fluctuates near 1.1900 on Tuesday. Markets turn cautious, lifting the haven demand for the US Dollar ahead of the release of key US economic data, including Retail Sales and ADP Employment Change 4-week average.
GBP/USD declines toward 1.3650 on renewed USD strength
GBP/USD stays on the back foot and declines to the 1.3650 region on Tuesday. The negative shift seen in risk mood helps the US Dollar (USD) gather strength and makes it difficult for the pair to find a foothold. The immediate focus is now on the US Retail Sales data.
USD/JPY drops toward 155.00 as focus shifts to US data
USD/JPY meets fresh supply and inches closer toward 155.00 in the Asian session on Tuesday. The Japanese Yen holds the upper hand over the US Dollar after Japanese Prime Minister Sanae Takaichi led the ruling Liberal Democratic Party to a historic landslide win and on intervention talks. Traders brace for key US economic data that could offer more clues on the Federal Reserve's monetary policy.
Editors’ Picks
EUR/USD holds near 1.1900 ahead of US data
EUR/USD struggles to build on Monday's gains and fluctuates near 1.1900 on Tuesday. Markets turn cautious, lifting the haven demand for the US Dollar ahead of the release of key US economic data, including Retail Sales and ADP Employment Change 4-week average.
GBP/USD declines toward 1.3650 on renewed USD strength
GBP/USD stays on the back foot and declines to the 1.3650 region on Tuesday. The negative shift seen in risk mood helps the US Dollar (USD) gather strength and makes it difficult for the pair to find a foothold. The immediate focus is now on the US Retail Sales data.
Gold stabilizes above $5,000 ahead of US data
Gold enters a consolidation phase after posting strong gains on Monday but stays above the $5,000 psychological mark and the daily swing low. US Treasury bond yields continue to edge lower on news of Chinese regulators advising financial institutions to curb holdings of US Treasuries, helping XAU/USD hold its its ground.
Bitcoin Cash trades lower, risks dead-cat bounce amid bearish signals
Bitcoin Cash trades in the red below $522 at the time of writing on Tuesday, after multiple rejections at key resistance. BCH’s derivatives and on-chain indicators point to growing bearish sentiment and raise the risk of a dead-cat bounce toward lower support levels.
Dollar drops and stocks rally: The week of reckoning for US economic data
Following a sizeable move lower in US technology Stocks last week, we have witnessed a meaningful recovery unfold. The USD Index is in a concerning position; the monthly price continues to hold the south channel support.
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