What does leverage mean in trading?
In the financial world, leverage refers to the act of using borrowed funds for trading. Leverage is when you use an initial capital and borrow funds over it to trade or invest in an asset, hoping to make a profit. When you trade stocks that are leveraged, it would imply that you open a position with a broker where the majority of the funds are loaned from them. So you go ahead and have a leveraged trade on stocks that cost $1000 with only $200 where your leverage ratio is 20%. This would mean that you borrow the balance $800 from your broker. Check out more about leverage on the MT4 platform at multibankfx.com.
Why change leverage on MT4 and how does it matter?
In forex trading, the use of leverage is seen as a “double-edged sword” as it has the capacity to boost both your profit and loss.
Typically, traders who are new in the market would easily accept the leverage that their brokers have to offer. However, it is not necessary that it suffices for you. Suppose you want to trade bigger positions, or you feel that your risk appetite is big enough and thus you want to try earning more profit, you would want a higher leverage ratio. Remember that there can never be too much leverage. When you trade with higher leverage with a small account balance, the probability of loss is far greater. At this stage, the timing of when you enter or exit the market becomes crucial and the room for error is really negligible.
While you increase your leverage, also consider increasing the balance in your account. Make sure that you trade in such a way that you have enough capital without facing the high risk that comes with leverage.
Changing leverage on MetaTrader4 depends largely on your broker
MT4 is an online trading platform and as an in-built aspect of it, there is no option to change account leverage for an existing account. Hence, in case you have downloaded the MetaTrader4 platform via its creators metatrader4.com to practice your trades with a demo version, you would not be able to alter the leverage. But fret not, as the important leverage settings can be tweaked and customized via your broker’s user portal. Different brokers have different ways of working with this setting and you should first check with your broker who assisted you in downloading MT4 how the settings can be changed.
How to change leverage on MT4
The easiest way to increase or decrease leverage on your MT4 platform is to go to your broker’s web portal. Each broker would have a web portal, however, they’d appear different. The key aspects though remain the same:
- Go to the “Accounts” section of your “Secure Area” on your profile.
- Select the “pencil icon” next to the MT4 account number.
- Choose new leverage.
The highest leverage ratio will rely on the securities that are traded. Some would work with a fixed leverage system that operates on the basis of the position traders that are established on the MT4 trading platform.
Benefits and risks of using leverage
- Magnified profits. You simply need to set aside a small part of the value of your entire trade to earn the same profit that you would in conventional trade. Profits are measured on the basis of the overall position value. Margin trading can boost your profit as well as your loss.
- Magnified losses. Leverage could amplify both your profit and loss since your starting capital is lesser than what you would set aside for conventional trades. Hence, it is much easier to not take into account the actual amount you may end up losing if the trade does not work in your favor. You would not end up losing more than an amount that exceeds your account balance but make it a practice to see the full picture in your trades so your risk management strategy is appropriate.
- Gearing opportunities. Using leverage could leave you with more capital which can then be used for other investments. This ability to boost the available investment amount is referred to as gearing.
- Funding charges. When you use leverage, you basically borrow the balance amount from your broker for your trades by giving your deposit as the cost. To keep your position open overnight, you will have to pay a small fee for the cost incurred to do so.
- Shorting the market. Using leveraged products to predict market moves allows you to earn from the markets that are tumbling as well as from the ones that are doing well. This is referred to as going short.
- No shareholder privileges. When you trade with leverage, you no longer own the asset you’re trading.
- 24-hour dealing. Though trading hours change from one market to another, a few markets such as key indices and forex markets are open round the clock.
- Margin calls. If your position does not move in your favor, your broker may ask you to add more funds to your account so the trade can remain open. This is called margin call where you would have to either add more funds or exit positions.
Risk management while using leverage
Leveraged trading could be a risky business since your losses can be more than what your initial capital is. But to deal with the risks, you can choose from a number of risk-management tools which would cut down your potential loss, including:
Having a stop for your position could limit your losses if the price does not move in your favor. But remember that markets tend to move fast and due to some conditions, the stop might not be hit at the price you’ve set.
- Guaranteed stops
These work in a similar way as the basic stops and would be met at the precise level you have set it despite gapping or slippage. In case your stop is triggered, you would have to pay a small premium along with the general transaction fees.
- Negative balance protection
In case your account balance hits negative, you would not have to pay the balance later as your broker will bring it back up to zero without any charges.
- Limit orders
It is a good practice to set a limit order and carry out your trade at a predetermined level that is better for you than the current market price.
You can have a limit entry order in place when you open a fresh position or limit closing order to end the present position.