How Extreme Leverage can Blow off Trading account

By | December 11, 2018 3:31 pm

Raj was a very Happy Guy Yesterday evening , He was Short in Bank Nifty and Nifty “5 Time” his normal limit and also bought huge quantity of Puts expecting market to open gap down as BJP might Lose the State Election. He also got a Booster when we saw the New RBI Governor has Resigned and with US market falling and SGX trading 232 points down and messaging floating bank nifty can go down 1000 points based on RBI news he was on Cloud 9 and was proud of Himself finally he got his best trades.

He Started thinking how much will he make 5X easily he thought and was thinking what all he can buy with all this and can improve his lifestyle and also Boost on Social Media than he finally cracked the Nut.

But Market has the plan of his own Bank Nifty opened gap down Immediately recovered and now is trading in Positive All the paper gains which were made are in Loss, Due to Crash in VIX PE Premium is  just got eroded and in the process he was not able to cover BN shorts and he went in Emotional freeze mode and all dreams came crashing down. Due to excessive leverage he was carrying he lost a big chuck of capital also.

What Is Leverage?

Leverage is the ability to make large trades in the market with only a small amount of actual capital in your account. Most of brokers provide 1:10 or more leverage. So with a 1 lakh account you can make positions worth 10-20 lakhs.Leverage is when a small amount of capital is able to control a much more expensive asset or group of assets. When trading and investing, leverage has the ability to magnify the skill set of the trader. If the trader is adept and able to profit while trading, leverage (margin) may help the trader to make profits faster and/or in larger quantities. However the reverse is also true. If the trader is not proficient and racks up trading losses, he or she will do so more quickly and in larger amounts when using margin.

How Can Leverage Hurt You?

Leverage can be a sharp double-edged sword. It can work for you, or against you. If you make a trade with a Nifty 1 lot of 75, each point would be worth around Rs 75. If you gain 100 Points, everything is great, you used 100 K and made a 7.5% return. If you lose 100 pips, you have a 7.5 % loss just as fast. While it is really nice to think about the money you can make, the money that can be lost is rarely discussed. Leverage can be very dangerous if used improperly. Brokers can offer heavy leverage, but that does not mean that you are forced to use it all the time. In fact, many traders often use less than2 times leverage. While the possible gains are smaller, so are the possible draw downs.

Use the Least Amount or None at All

It’s unfortunate because using excessive leverage is one of the leading.
Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning and trade in your limits.

Category: Trading Education

About Bramesh

Bramesh Bhandari has been actively trading the Indian Stock Markets since over 15+ Years. His primary strategies are his interpretations and applications of Gann And Astro Methodologies developed over the past decade.

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