How to choose leverage wisely?

Leverage is a common factor to drive out curiosity for traders. It is an excitement in the intentions of the traders that beginners in trading should know how it works. Most of the traders do not depend upon the ratio rather go on selecting some random leverage beyond 1:200 and upwards. However, here, one must know that the leverage amount varies from the segment to segment and broker to broker. One needs to have a sufficient amount in his account on the basis of which he can have the leverage. 

Hence the normal practice is one needs to keep a hefty amount in his account if he wants good leverage in any of the segment. The amount depends on the segment in which he wants to have trades. For the intraday trades, the margin amount is low while for the derivatives it is much higher than the intraday one.

What is the leverage?

Leverage is the amount that you borrow from your broker to carry trade of the instruments. To invest in your trade, you need funds which are brought by way of leverage and that on the near end produce trading power. When you decide to use high leverage for initial margin requirement or maintenance, you can then build a huge bank of money. This is when the brokers invade in to use high leverage rather than sticking to pragmatic leverage.

How can you calculate your leverage?

If you have not given a thought to this or you have completely given this part to your broker, then you should once follow this way to calculate your leverage. To determine the leverage, by dividing the total value of your opened positions by your trading capital, you can get your leverage.

Consider, your account balance is $4000. And, your open positions are $100,000 or 1 lot. This brings your leverage to 25 times that is derived from 100,000/4000. And the same goes if you trade two lots, then leverage would go for 40 times and so on. High leverage stockbrokers make sure that your lots go up and you have more open positions.

How does higher leverage give rise to higher risks?

Due to fast movements in price, a trade can go against you in no time, and that can be highly disastrous as you have to smoke each step carefully. Leverage is a necessary evil. It always depends on the trade that you are going to formulate. It stays a friend for some time and foe for the rest of the time.

Higher leverage can have magnifying results on your stocks. Always use high leverage with good risk management principle. Experienced traders try to maintain distance from high leverage.

How can you choose your leverage wisely?

It is better to spend or use the limited or standard amount of leverage that allows you from a wider loss. High leverage stockbrokers will prompt you to take the risk of leveraging high, but it is advisable not to undermine the risks as they are bullets to wide loss at par.