Traditionally, investors can only invest with the amount of capital they have. This means the entry barrier is high and only a handful of individuals can access the capital market and get involved in investing and trading.
However, as things get digitalized, the trading industry is more accessible to retail investors/traders than ever. Things like margin trading and low deposit requirements encourage the wider public to sign up and participate in the financial market.
Margin trading means trading with leverage. It allows you to trade a larger amount of size compared to what you otherwise could with your capital.
The Implications
Accessibility
With the introduction of margin trading, accessibility to the markets has increased significantly and it has become easier than ever for anyone to trade.
Margin trading with leverage means a trader can deposit a small amount of capital and will be able to trade proportionally larger positions.
Example
With a leverage of 500:1, a $200 deposit has the same purchasing power as a $100,000 account without leverage. See how big of a difference in the required capital with and without leverage?
Anyone with $200 can get themselves a live trading account and get started with trading, with the potential to make a lot of money which brings us to the next point.
Higher potential returns
Imagine you have a $1000 account without leverage, and another account with 20:1 leverage and you are trading TSLA shares.
Without leverage, you can only trade up to $1000 in notional value. With 20:1 leverage, your capital is being levered to $20,000. Now, you can trade 20 times more.
If TSLA goes up by 1%, you are making 1% ROI on the non-leveraged account, and 20% on the leveraged account (assuming you are utilizing the whole $20,000 margin). Now that is a big difference.
Diversification
As mentioned previously, your purchasing power increases proportionately to your account leverage. This means you have more options and will be able to diversify your portfolio better. You have more funds to allocate to different asset classes like growth stocks, defensive stocks, or even FX, Cryptos, and many more.
Double-edged sword
By having the ability to generate a higher ROI, you are also faced with a higher risk. Having 20 times more exposure means you have the potential to make gains 20 times faster and also lose money as fast if the market turns against you.
With that being said, here is how to properly utilize margin trading.
The Safeguard: Managing Risks
We need a reliable risk management system. This is especially important when we have a trading account with the capability to increase our market exposure by 500 times (a 500:1 leverage account).
- Lot size calculation
You don’t need to create your own excel or do manual calculations with formulas. You can search online and there will be lot size calculators available for free.
Or, you can also install the Smart Trading Tool from Alchemy Markets and use “Mini Terminal”.
(Log in to your client portal and find the download button on the left)
In the Mini Terminal, there is a specific section for Lot Size Calculation. You have the option to adjust your risk parameters based on fixed cash risk, a percentage of equity, or a percentage of the balance. Once you input the parameters, it will automatically show you the lot size for your trades and the risk in monetary value.
- Risk per trade
Do not risk too much on any single trade as there are no certainties in the market, regardless of how decent a trading signal may look.
A good rule of thumb is to not risk more than 1% on a trade. Practicing this will also avoid fear from clouding your objective judgments.
Ending thoughts
Margin trading is an excellent tool for those who know how to utilize it well. It allows you to capitalize on bigger opportunities with lesser capital by amplifying both potential gains and losses.
It is also perfect for those who have a bigger risk appetite and provides the option to flexibly diversifying your trading positions.
If you are ready to trade on margin and take advantage of all the big movements in the markets, sign up and trade with Alchemy Markets now.
The only place where you get to trade more than 1000 instruments including Stocks, FX, Cryptos, and many more with ultra-low spreads and institutional grade liquidity.
Disclaimer
Please note that all the information provided in this guide is for information purposes only. You should not construe any such information as trading/ financial/ investment or other advice.
