By DK Aggarwal
A dealer ought to all the time take the idea of leverage very significantly, as a result of being overleveraged can current important dangers, whereas in case you select to remain underleveraged, it might minimise your earnings potential.
Leverage should be used solely inside its logical limits, as its impact on each positive aspects and losses can get magnified. A dealer ought to use leverage solely when the benefit is crystal clear on her aspect. Buying and selling quantity out there is an equally necessary issue to be aware of whereas utilizing leverage.
Leverage is a facility provided by a dealer or monetary middleman to a dealer to permit him to take positions larger than what he can do with the collateral stability in his account. Because it provides larger market publicity to the dealer, this may work as a double-edged sword.
When used correctly, leverage generally is a game-changer. Excessive leverage will be engaging, however may be very dangerous. Choices buying and selling, futures contracts and shopping for on margins are all examples of leverage buying and selling.
A highly-leveraged commerce can rapidly deplete your buying and selling account if it goes towards you. The larger the quantity of leverage on the capital you apply, the upper the danger you’ll take for your self. So, it is very important monitor the positions, apply cease loss and use different market orders to forestall large-scale losses. As all the time, merchants must maintain their feelings below management on this space.
Sticking to a buying and selling plan and fixed evaluation of errors are necessary. One ought to design a method for every commerce. Place measurement is vital to retaining the general buying and selling danger below management. One mustn’t take a place with out first establishing the reward-to-risk potentialities. One ought to perceive the danger related to a commerce and ones danger urge for food earlier than deciding on the scale of leverage to make use of. As soon as the danger by way of the quantity is thought, it’s attainable to find out the potential lack of capital. And dealer mustn’t take losses in extra of 1-2 per cent of capital in a single commerce.
(DK Aggarwal is Chairman and MD of SMC Investments and Advisors)