What is leverage in CFD trading?4 min read
Leverage in CFD trading allows investors to access more capital than they can typically afford, and it is a way for investors to maximize their opportunities in the markets. However, it is important to remember that losses can exceed your initial deposit when you trade with leverage, and therefore you should always only trade with money you can afford to lose.
How to trade CFDs with leverage
To get started trading CFDs, you must choose a broker and create a live account.
Choose a broker
When choosing a broker, you should consider the fees they charge, the customer service level, and the types of accounts they offer. You will also want to ensure that the broker is regulated in Japan. If you are not a native Japanese speaker, your best bet might be to choose an international bank with a Japanese presence, or a Japanese bank with English-language services, so that you can participate in trading with ease.
Open an account
Next, you must open a live account with the broker.
To open a live account, you must provide your personal information, including your name, address, and date of birth. You will need to verify your identity before you can proceed, which you can typically do with a resident card or any photo ID.
Deposit money into your account
Once your account is opened, you will need to deposit money into it before you can start trading. You can do this via bank transfer or credit/debit card. Most brokers will require a minimum deposit of ¥100, but you should check with your specific bank before depositing funds.
Choose products to trade
When choosing a product to trade, you should ensure that you are familiar with the market and how to analyze price movements across the board. This includes both fundamental and technical analysis, as it is crucial to understand how the markets work.
When you trade CFDs, you are trading a derivative. You do not need to own the underlying asset you want to trade – you only need to speculate on its price movements in the market. This gives you a degree of freedom that is not associated with traditional trading.
Selecting your leverage
When choosing your leverage, you should consider your investment goals and risk tolerance. If you’re prepared to risk more, you may want to use more leverage. However, if you are just starting out, you might want to start small and work your way up.
Once you’ve chosen your leverage, you can start trading CFDs. To do this, you will need to place an order with your broker. You can choose to buy or sell a CFD, and you will need to specify the amount of money you want to invest.
Your profits or losses will depend on the underlying asset’s price movement. If the price of the asset goes up, you will make a profit. If the asset price goes down, you will incur a loss.
Monitor your positions
It’s essential to monitor your positions carefully, as your losses can exceed your initial deposit. You can do this by keeping up to date with price movements in the market. If anything goes awry, you can close your position ahead of time.
Benefits of trading with leverage
Even though trading with leverage is considered risky for most, there are still great reasons as to why someone might want to use them.
You can trade with a smaller amount of money
When you trade with leverage, you can take advantage of bigger opportunities with just a small deposit. This is because your positions will be maximized with leverage. For those who are adventurous, it can be a great way to seize opportunities.
You can trade more assets
If you only have a small amount of money to invest, you may only be able to trade one or two assets. However, when trading on margin,, you can trade more assets as you only need to put down a small portion of the total value.
You can take advantage of small price movements
Finally, leverage maximizes opportunities, meaning you can take advantage of markets in which price movements are relatively small.
Drawbacks of trading with leverage
As always, leverage is not a perfect tool in trading and there are drawbacks involved.
You may also maximize your losses
When you trade with leverage, your losses can exceed your initial deposit because your losses are based on the total value of the asset, not just the portion you invested. This means that leverage also maximizes your losses, something which you may not be prepared to face.
Your broker may require a higher margin
When using leverage, your broker may require you to maintain a higher margin, meaning you will need to deposit more money into your account to keep your position open. This can be less than ideal for some traders.
The bottom line
Leverage is a very useful tool for those who are more adventurous in their CFD trading, and they can provide an avenue of growth in one’s portfolio when used carefully. However, it is always best to understand the tool thoroughly before attempting to use it.