The use of leverage in CFD trading, or contracts for difference, amplifies the returns on trading capital. It does so by borrowing money from the broker to purchase bitcoins instead of using one’s own money. Traders can buy a larger quantity of bitcoin via leverage than could be with one’s capital alone. One would not have been able to buy one bitcoin at $300 if only $100, but it would be possible when purchasing with 20:1 leverage.
CFDs are increasingly becoming an essential part of any trader’s strategies. For example, it allows for a range of opportunities not otherwise possible, such as buying at the beginning of a rising trend. The purchase will only be made once enough funds have accumulated via interest payments on the loan or sale of other trades.
Unlike day trading strategies, it doesn’t require constant monitoring and can often be automated by trading bots. It can also allow one to enter into short-selling positions. One would buy bitcoins in anticipation their price will rise before selling them back later at a higher price – vastly different from simply selling at a loss once one has bitcoins.
Advantages of using leverage in CFD trading
When traders wish to attempt more risky investments without spending too much capital, they often turn to CFD (Contract For Difference) trading, where you speculate on changes in the price of an asset.
The primary benefit of using leverage is holding a position as prominent as 100 times as large as your original deposit. Hence, it’s possible to trade with a relatively small deposit and have a massive impact on the market.
In addition, if you use leverage properly, it can be an effective way to increase profits from your investments. If you look at a trader who only uses 50% margin for their investment and another person who uses 100% margin, then for every 10 per cent change in the price of the underlying asset, the trader who is only using 50% margin will make 5 per cent. At the same time, the trader who is using a 100% margin will make 10 per cent.
Thus, by using leverage, you can magnify your profits (or losses) depending on the direction of the trade.
Risks in using leverage in CFD trading
It’s important to note that leverage can work against you if the markets move against your position. For example, if you have a $1,000 account and use a 100:1 leverage ratio, a 1% price move against your position would result in a $10 loss.
When trading CFDs, it’s essential to always use sensible risk management practices and never trade more than you can afford to lose. Remember that even if you’re using leverage, you can still lose more than your initial investment.
Get the most out of leverages
To get the most out of leverage, it’s essential to use it in conjunction with stop loss- and take profits orders. A stop loss is an order placed with your broker to sell a security when it falls below a specific price, and a take profit order is an order to sell a security when it reaches a particular price. These orders help you protect your profits and limit your losses, and they should always be used when trading CFDs.
There are both risks and rewards to using leverage in CFD trading, as with many trading methods. Whilst the risks are slightly higher than average. It also allows traders access to opportunities that would otherwise not be available. As always, traders must perform due diligence before entering into any trade.
Using leverage in CFD trading can be a great way to increase your profits while limiting your losses. Still, it’s essential to use it wisely and always employ sensible risk management practices. Using leverage correctly can make more significant gains while still protecting your capital. If you are a new investor, we recommend contacting a reputable broker from Saxo Bank and starting your investment journey.