Taking A Leverage Position When Trading Futures

Taking A Leverage Position When Trading Futures

 

Trading futures offers leverage. This means that even with a small account size you can make significant gains in the futures market. The leverage lets you maximize your positions and works to increase the gain percentage on the trade. To be able to trade in futures using leverage the trader needs to put a margin payment which allows him to buy or sell the futures contract. The trading size is large and thus you should understand that taking leverage not just magnifies your profits but also magnifies the losses.

Trading futures using margins

The initial margin deposit that you deposit with the futures broker is to protect any loss that may happen during the trade. Once the position is closed you get back the margin along it gains or the loss of the trade. Most of the brokers will ask for a position of the contract value as the margin amount. This is set by the exchange. In times when the market is highly volatile, the futures margins will be increased.

Leverage increases gains as well as losses. If the trade that you take goes in the wrong direction then you stand to lose a lot of money. Your broker will let you know of the minimum amount that you need to keep in your account to be able to keep the position open. You may even receive a margin call if the price falls lower and you end up in more loses. The margin call is done by the broker to ask you to deposit more fund in your account to compensate for the losses of your trade. If you are unable to deposit the money in your fund then the trade will be closed and you suffer the loss.

Trade carefully when using leverage

Trading in the futures market using leverage is risky and one should understand that it is risky. It is important that one does proper planning before entering the trade. Also when the market is very volatile it is advised to not take a high leveraged trade.

This does not mean that one should not trade in the futures market. It is important to research well and proper risk management before taking futures position. Never take a position on your gut feeling or hope. That does not work in the financial market.

Caution

When trading in the futures market on the automated trading robot take care to never use the minimum margin amount because this in all probability will lead to a margin call. You should put in more money than the initial deposit because it will give some breathing space for your trade.