36 Leverage Trading Tips For Beginners & Advanced Traders
In this guide, I will list my 15 most valuable leverage trading tips for all new investors who are planning to use borrowed funds to increase their earnings and overall results. You probably wonder, what can go wrong? I can tell you that a lot of things can go wrong when using leverage to boost your trading results. You might miss adding your stop-loss before volatility strikes, your broker might charge you 1% fees per trade, and the automatic level of leverage might be set to 1:125 without you knowing it. That is equal to jumping into a pool of sharks with a bleeding foot, and you don’t want to do that.
However, you can avoid most of the easy mistakes and skip right to the good parts of actually making good money with leveraged investing. What if I told you that the majority of beginners fall into the same traps which can be avoided quite easily if you educate yourself before you start. See this tutorial as your first lecture on leverage investing and stick around to the end. I also recommend that you write down three tips that you think will help you the most in your journey to becoming a seasoned trader.
If you want to know more about what leverage trading is, how it works, and some of the pros and cons, please read the general leverage trading guide.
I have decided to divide this guide into two parts where the first part is dedicated to complete beginners with close to zero experience in leverage trading. In the second part, I will give trading tips for traders who already have experience with leveraged investing and are looking for an edge that will help their process of actually making money. At the end of this guide, I have listed some commonly asked questions that will be helpful for any trader.
In this guide:
Leverage trading tips part 1
This first part will be very useful for those of you who are new to investing and trading with leverage. These tips will help you get started and they will save you from many of the first mistakes that traders make when using borrowed funds. Many of them are aimed at preserving your capital and avoiding losing money at the beginning which is one of the most important aspects for every beginner trader.
While choosing between forex, crypto, and stocks, I recommend that you read all these tips to make the most educated choice possible.
Never deposit more capital than you can afford to lose
As a beginner trader, this is one of the most crucial parts to protect your savings and stay alive in this difficult business. When you first start, I want to stress how important it is to not deposit more money into your trading account than you can actually afford to lose. Yes, I know, most people can’t afford to lose more than a couple of hundred dollars at best but this is why leveraged investing is so interesting, you don’t need a big account to make money.
Check your savings and decide for yourself how much money you would actually be ok with losing. The reason why I bring this up is that there is a high possibility that you will lose your whole trading account when you first begin.
It’s even possible to lose everything a couple of times in a row. So, make yourself a service and only deposit the amount you are comfortable losing. Once you have learned the ins and outs of the game you should slowly start to build your account and you don’t need more margin capital. A small account will protect your overall downside in the beginning because you never know what can go wrong. Everyone makes mistakes, even you!
Yes, it is possible but it’s not common. Most operators today are of high quality, however, when you choose your broker make sure that it is fully regulated and supports negative balance protection.
Always use a stop-loss
The first lesson as a trader is to protect your losses and use proper risk management while trading with leverage. The best tool you will ever have is without a doubt the stop-loss order. A stop-loss is an order type that will automatically stop your position out at a certain loss to prevent further losses. For example, if you have a $500 account and you plan to make this account last as long as possible, use a stop loss of 1% of this capital. Choosing a stop-loss level of 1% will keep you in the game for a very long time and you will not take on bigger losses than necessary.
A stop-loss is an automatic order that will trigger even if you close down your trading terminal during the night. Most platforms will let you choose a stop-loss order based on a percentage, however, if they don’t you can always calculate the 1% on your own. Losing 1% per trade with $500 is a loss of only $5. This is completely reasonable and you can easily take 5-10 losses in a row while testing a new strategy. Remember, do not leave an open trade without a stop-loss, even the pros use it!
Never meet a margin call
A margin call is a sign that something has gone wrong. It might be the size of your position, the leverage ratio, you forgot to add a protective stop-loss, or anything else. It doesn’t matter why you are receiving a margin call but it’s a warning sign that it’s time to hit the road and leave the market, right now! Far too many traders meet their margin calls with more margin capital only to save their position. The truth is that you have been wrong on your trade, in a big way, and it’s time to close it out before you close your account. Since leverage increases both wins and losses you might be very close to losing your whole account.
Every trader makes mistakes and every trader loses money regularly. You need to swallow your ego, accept the loss, go back to the drawing board, and start over. If you meed your margin call with more capital you are only throwing more wood on the fire without knowing how to control it. A margin call is a sign that you have lost control of your position and the only way to regain control is to close the position and accept the loss, no matter how big it is. My worst losses occurred early in my career when I met my margin calls with more capital. Don’t leave your position to hope, take control!
Start with a low leverage ratio
Leverage ratios start at 1:1 and go up to 1:5000 depending on the broker you choose. All beginner investors should start at a low leverage ratio with a maximum of 1:10. A leverage ratio of 1:10 means that you can open positions that are 10x bigger than you would normally be able to open. These position sizes will move the needle more than you think and you are going to be shocked at what leverage can do to a position. When you win it’s a good thing but what I’m worried about is the possible downside.
Trading with leverage is wonderful when your position goes your way but the reason why you should choose a low ratio, in the beginning, is to experience how leverage affects your losses as well. You will be surprised how fast you can go from break-even to losing $250. Starting with a high leverage ratio is probably one of the biggest mistakes novice traders make and also the cause of the biggest losses. Remember, there is time you scale up later once you have gotten used to leverage and how to protect yourself from downside swings. Our guide on the best leverage for beginners explains this topic in detail.
When you are ready for high leverage trading you should still keep the position sizes small until you can handle the large swings in your account. Use a proper strategy for high leverage trading in order o manage risk and increase profit.
Focus on one market
If it’s your first time getting into the leveraged trading scene I highly recommend that you focus on one market at a time. Investing with increased buying power can be a little bit like a rollercoaster and you never know how fast or bumpy the ride might get. This is why it’s important to select one market, for example, the forex market, and focus on one currency pair. Once you get comfortable investing your money with leverage you can gradually add more markets or currency pairs.
The reason why most beginner investors fail is that they think they can handle several markets at once. This is almost impossible, especially if you are a day trader. Unless you have years of experience I can’t stress enough the importance of sticking to that one market you have selected. Otherwise, it’s going to be like trying to drive two cars at the same time. Once you lose focus on one car things will go south pretty fast and you will be in big trouble. Also, remember that leveraged investing increases your output so you don’t have to force several markets into your strategy. Most professional day traders focus on one market at the same time, follow the experts!
Use a trading strategy you know well
Now, if you have a leverage trading strategy that you are familiar I recommend that you stick to the same strategy when getting into leveraged investing. This is because if you try new ways to trade with more capital you are going to find yourself lost without a good grip on the action. Knowing your strategy will yield better results and you will feel more in control. Then, when you have traded your strategy for a couple of weeks or months you should start to branch out to more complex strategies to take advantage of the fact that your increased position sizes will do well in several strategies.
If you don’t have a favorite setup or strategy I recommend that you start looking for a strategy that suits your investment style. If you are a short-term trader you should look for some intra-day setups and if you are more of a swing trader, try to find setups that let you hold a position overnight. Once you become familiar with this strategy, stick to it, and increase the position size instead of changing the strategy.
Use a take-profit order
This is a strategy that most novice traders miss out on in the beginning simply because they want to open and close the trades themselves and also due to the fact that they don’t know how to operate a take-profit order. Take-profit orders are automatic order types that will lock in your profit at a certain level. For example, you can choose to add a take-profit order at 2% above your entry price or at a specific price level. This comes down to personal preference and the more you play around with it the better you will understand what works for you.
The reason why a take-profit order is so useful for beginners in leveraged trading is that most traders have trouble taking profits. Once they see their position in green they immediately wish for more luck and wait for an even bigger profit. The truth is that markets are very volatile when you add borrowed funds to the equation and you don’t need much of a movement to earn money. Having a take-profit order will constantly add profits to your account and you can grow it slowly and steadily instead of trying to hit a home run with every trade.
Know all fees before you start
This is a no-brainer if you are going to start investing with increased buying power, with bigger position sizes come larger fees. This goes for both the transaction fee and the management fee. The fee for opening and closing positions depends solely on the size of the position so you can imagine what happens to the commissions when you increase your position size by x5, x10, or x25. Exactly, your fees are increased the same amount and you are the one paying for that.
So, when choosing a broker with leverage you are obligated to read up on all the fees they put on their traders, and if you are not happy you should pick another platform. To learn more about commissions read our guide on leverage trading fees. Here you will learn the ins and outs of the commission structure that you can expect when you deal with different kinds of brokers and products.
Cut your losses fast
When I started trading the financial markets I never understood why gurus and different mentors always told me to cut my losses fast. The true reason for this is that if your position starts going against you immediately there is something wrong. When day trading with leverage your position should be in the green after a few seconds otherwise you are doing something wrong. If the market goes against you, don’t sit around hoping for things to turn around, instead, cut your losses and jump to the next trade.
I know this is easier said than done but I want you to know that this has been one of the key aspects of some of my most profitable periods as a trader. Once I learned to cut my losses fast and let my winners run I instantly became a better trade. So, next time you get into your favorite market, don’t tolerate losses, just cut them!
Avoid trading when you are tired
I should not have to write this but I want to point it out anyway. Investing with a tired head is the same thing as driving when you are tired. You lose focus and you make mistakes. Mistakes in trading or investing usually lead to losses and this is not where you want to go with your process. If you feel tired, simply don’t trade, step away from the computer and do anything else. I know this can be difficult when you are excited about following your market and getting into the market, but it will save you from a lot of headaches.
My simple trick for this has always been to understand when I get tired during the day. Personally, I can’t focus after 16.00 so I avoid getting involved with the market unless I have had a wonderful night’s sleep on a weekend and I can trade Bitcoin during the afternoon. So, listen to your body and learn when it’s time for you to shut down the computer. This will save you a lot of money in the long run!
Use market orders to enter
This is one of those things that beginner investors don’t understand but it is crucial that you only enter the market with market orders instead of limit orders. This is because a limit order is picked up at the end of a range and then the price is supposed to retrace back to where it was trading before. What you are essentially doing with a limit order is you are trying to buy a bottom. This is very dangerous because you are betting on the opposite side of where the market is heading at the moment.
Your strategy as a day trader should be focusing on market movement that goes with the market and not against it. Betting against a market is incredibly difficult and should only be attempted by experienced traders. This is especially important when you trade leveraged products since the timing of a limit order has to be even better.
Check your internet connection (seriously)
You don’t want to get logged out from your trading terminal due to a poor internet connection. This can result in tragedy and if you have not had time to add your protective stop loss to a large position then your whole account can get wiped out if you are unlucky. I have had moments where my internet connection has failed me and I’ve lost money and it is the most unnecessary mistake out of all.
If you know you have a poor internet connection at least make sure that you have your mobile network as an emergency backup should the internet go down. This way you might be able to log in through your phone or share your mobile as a hot spot to either cancel the position or add a stop-loss. Remember, trading is a performance sport, and if you lose one of the most valuable tools you are in big trouble.
Choose a regulated platform
There are many brokers who make a living ripping off beginner investors by using malicious behavior such as increased fees, locking funds, and right-out closing accounts for no reason. 99% of these platforms are unregulated off-shore platforms that you should avoid like the plague. When choosing a leveraged broker you should take your time researching some of the top brokers on the market to learn which products they offer, their fees, and payment methods.
It is also important to test out a platform before you deposit real money to see that you like what you are dealing with and that you are comfortable with the user interface. None will force you to deposit money and until you are 100% happy with your broker you should not invest one penny. I recommend every new trader to go for one of the bigger names on the market and depending on what market you trade there are plenty of options to choose from. Most brokers in leveraged stock trading are regulated as long as you pick a more popular name.
Avoid trading from your mobile phone
I find it very hard to trade from my mobile phone, especially day trading. Most of the time I’ve tried to make an effort by opening and closing positions to make a profit through a broker app I’ve made mistakes. It’s usually a problem of entering and placing stop-losses and reading the market correctly. Everything is just small and difficult to maneuver.
The mobile app is good for checking your account balance, performance analytics, checking for chart patterns, reading news, and on some occasions closing and opening positions if you are in a hurry. Unless you are in desperate need to close a position that has gotten out of hand I strongly recommend you not to trade from your mobile phone. No trade is so important that it can’t wait until later!
Start on a demo account
During my first year as a trader, I was hooked on the demo account that allowed me to demo trade. I spend my whole day testing strategies in the forex market to elaborate on which position size would be the best and how to enter with certain order types. It was a blast! It’s just like when you start driving a car, you always start in a safe environment where there is no risk for failure. For example, a big parking lot is a good way to start driving your car safely without running the risk of crashing into something.
The same goes for your investments, you should always start out with a demo account until you have properly learned the terminal you use. Most of the new platforms have a ton of features that you need to learn how to use before you can put real money on the table. The only thing that a demo account will not teach you is how to deal with emotions. Since you can’t lose anything there are no emotions in the game. However, this comes later and that’s another chapter in your career as a trader.
Know the different leveraged trading products
This is an important topic so listen carefully. If you are going to start trading with leverage you need to know which product is best suited for you. There are several different products that work in completely different ways. For example, options trading is a way for you to use a limited risk on every trade. Futures products have unlimited risk with a physical settlement that can throw you off. CFDs are mirrored contracts that have an added overnight fee and are not good for swing traders. Traders often leverage trade forex through CFDs to benefit from regulated accounts.
So, depending on whether you are a short-term trader or a long-term trader there are so many different options to choose between. The latest additions to our products are the leveraged cryptocurrency contracts which are usually perpetual swap contracts that run without any settlement days. However, these contracts can be expensive and if you are not careful you might bleed to death from too many trades.
You are wrong more than 50% of the time
The most profitable wall street traders are right at about 50% of the time. We are not nearly as talented or informed as these guys are so should expect an even lower number. I would say that at its best we can be right about 40% of the time if we are very short-term oriented. This means that on nearly 60% of your trades you should expect to lose. This means nearly 2 in 3 trades will be a loser. That’s something to keep in mind while you trade.
The better you know your strategy the easier it will be for you to stick to it even when your positions are going against you. On some occasions, you will lose 5 trades in a row, and that’s perfectly ok. This is a numbers game and you should not worry about a couple of losses. After each loss, write down what happened, and how much you lost, then turn the page, and open your next trade!
Never leave an unprotected position
In my early days, I once opened a position with 1:75 leverage and I went to work thinking that I was so sure about where the market was heading. Big ego I know. When I arrived to work I opened my trading terminal and check my account. I was down $2000. I panicked and could not work during the whole day. I eventually close out my position after some sweaty hours and I felt like an idiot.
The good part about this lesson was that I never repeated that mistake. When I came home that day I wrote down my mistake and I leveled my ego once and for all. The market will always hit you in your weakest spots and it will hurt like hell but if you can pull through and learn from these mistakes you will take the next step forward. When trading leveraged products, never leave an unprotected position.
If you can’t sleep you are trading too big
Leverage is fun, I admit it. Especially when you start out. To be able to open a position that is 50 times bigger than what you have ever opened before seems unreal and once you make the first large win you are hooked, I promise. However, the bigger you trade the more stress it will put on you emotionally and if you are staying up at night thinking about the results of your open position, you are trading too big.
Scale down the size to where it feels comfortable. You should not think about your open positions while you are not in front of the computer. Trading and investing is not a race, it is a marathon and the sooner you realize that the sooner you will start to make good decisions. The only time you are granted the option to add big to a position is when you are way in the green, which means when you already have a large profit and you playing with the house’s money.
Twitter and news make you lose
Following Twitter profiles and news websites religiously will make you lose. This is true and the sooner you learn that the better it is. Why is this you may ask? I will tell you. When you see recommendations on Twitter and in the news you don’t really know why they have bought and how they will manage the trade once they are in it. So, if you take the same trade, you are left naked with no defense.
If the market drops, should you increase your position size, or should you close out the position immediately? These are some of the questions you will ask yourself while you trade and there is no answer I’m afraid. Make your own research and make your own decisions. Once you start trusting your guts your results will improve significantly.
Leverage trading tips part 2
This part of the guide is dedicated to those of you who already have experience in leveraged investing and want to know how to improve your result by changing some of your habits and learning some new tricks. These are more advanced leverage trading tips so take your time and read each tip carefully before moving on.
Calculate your required margin
This is a next-level tip that will help you use your margin capital in a smarter way. First of all, you need to know how much of your own margin you are putting down in each trade to know your risk. Secondly, if you can calculate your required margin you also know how much you have left and how much you can put into other trades.
Knowing your required margin is crucial for you to take the next step in using leverage while trading and if you are serious about your results you definitely need to know the relationship between leverage and your required margin. The more leverage you add to the mix the less margin you need and in a way the less risk you have if you are using isolated margin for each position. To know exactly how much margin capital you need for each position, use our leverage trading calculator.
Choose between crossed or isolated margin
The difference between crossed margin and isolated margin is crystal clear. Crossed margin means that your open position can use margin from all your accounts on the trading platform should it be needed. This means that one position has access to all your margin capital. Should this position go against you it could end up in tragedy. On the flip side, if your position turns out to be a huge winner and you see that there is more room to run you can access more leverage and more capital since your full account balance is available to use for any position.
With isolated margin, you can only use the amount of margin you have put down when you opened the position which is good because you will only risk that much on each trade. However, if your position becomes a large winner, then you can’t push it by adding more leverage to the position. This concept is something that all traders should know about and it is very important when using borrowed funds.
Select which leveraged product is best for you
After you have been a trade for a couple of years you start to learn how your own personality reflects in your trading. Some traders are better off using options while others are better off trading futures contracts. Some products have a limited risk which will help you control your downside and make things more structured while others have an unlimited downside and upside which creates a more flexible environment.
When looking for the perfect product, think about what kind of person you are, and always try to focus on your strengths as a trader. Your strengths are always what is going to yield you the most money and your weaknesses are what is going to hurt you. I recommend trying out some different products to feel the difference and then choose which one suits you best.
Follow volatility smart
When using leverage you will soon realize that it is still the volatility that makes the money. Without volatility, there is nothing to trade and nothing to predict. Even if you add 1:100 leverage you are not going to be able to read a market that is dull. Many platforms have lists for the daily top movers and the daily top losers. These lists are perfect for finding the daily volatility.
No matter if you are a short-seller or a buyer, finding volatility is just as important as putting petrol in your car. Without volatility, there is going to be no output in the market and you will struggle to find a good setup. Once a market has started to move it usually continues to move if you find it early, otherwise, it might turn around in a big way and you have a retracement trade lined up.
Get ready to hedge
Leveraged brokers let you bet in the opposite direction by short-selling and this could become a great tool if you are trading a lot of sizes. When large traders open a position and find themselves in a good position for further movements it can sometimes be wise to hedge your position instead of closing it down when the market goes against you.
This has mostly to do with the psychological part of trading. When you are “in the green” you have an access balance and you are playing with the house’s money. This is one of the best opportunities for a trader and this is also when he has the best chance of thinking clearly without any risk. Remember however to always add your stop-loss level to break even to not through away any profits. Once the hedged position seems to have run its course, close it down in a profit, and leave your first position free to run.
Overtrading with leverage will kill your account
The most dangerous part of using borrowed funds as a trader is that the fees can eat you up if you are not careful. When you increase the size of your positions the size of the fees increases proportionally. If you are used to opening and closing positions of $2000 a couple of times per hour, you are not going to be able to do that with a leverage ratio of 1:20 or more.
Leveraged positions can cost everything between $5 to $50 in commissions per trade and if you keep hammering that buy and sell buttons you are soon going to pay hundreds of dollars in commissions only. If you are an active day trader you need to keep an eye out for your position size and maybe re-think your strategy to fit your new position size.
Never add to a leveraged loser
This is an old trading rule that goes back centuries but it still holds true today and even more when you add leverage into the mix. If your position is losing from the moment you opened it you have made a mistake with your calculations and it’s time to close the position. A position should start moving into positive territory quite rapidly after it has been opened and if it goes the opposite direction you are in trouble.
The only thing worse than not closing a bad trade is adding more margin to the trade. This is like throwing your money into the fire in an attempt to close out the fire, it doesn’t work. The same thing goes for your open positions. Don’t hope for things to turn around by adding more money, it will only make things worse. Close the trade and start over!
Confirm the trend on three different time frames
This is a technical analysis tip that will help you in picking better trades. If a setup has the support of three different time frames it tells you that a lot of speculators are seeing the same thing and that’s a good thing. The more investors and traders you have with you when going into a position the better it is and the higher the possibility of success you will have.
Check the daily, 8-hour, and 4-hour charts if you are a swing trader. If you are a day trader check the 4-hour, 1-hour, and 15-minute charts. This will not result in a win every time but it will skew your risk-reward ratio in your favor a little bit and you need all the edge you can find as a trader.
Don’t focus on your P&L
This is a beginner’s mistake and when you start looking at your profit and loss ratio you are doomed to make silly mistakes based on emotions. Your plan is in the market and in the charts, not in how much money you have made. When you trade with leverage you are going to see larger profits and losses than you have ever seen before you get ready to feel a little bit shaken in the beginning.
Looking at your p&l will cloud your judgment and you will not be able to think clearly. If you can block the visuals of your account balance or the open positions tab you should definitely close it down during your trade. The only thing that should confirm your decisions is the market. Unless the market gives you a clue to step down you should keep with your strategy. Wait for the market to give you the clues.
Plan your trade and trade your plan
If you don’t have a written down plan that you can follow daily then you are in for some big trouble. Trading is a performance activity where you need to be in good shape and prepared. You can’t come to the markets without a plan. The market will eat you up if don’t know how to react in certain situations.
A plan tells you what to do and you need to prepare your plan in advance. Once you have a strict plan for where to enter, how to manage the trade, and where to exit, only then are you allowed to trade with real money. Most beginner traders fail to create a plan and then they get caught in panic due to an unexpected market event and they lose money. Be prepared!
Save some margin capital for the winners
Margin is your number one tool when it comes to trading with leverage and the more margin you save for your winners the more money you stand to gain. You should be very quick with cutting your losses and be very generous with your winners. The sooner you understand how a winner behaves the sooner you will start to make the big bucks.
No matter if you are a swing trader or a day trader, there are going to be a lot of losers and a lot of winners and if you can focus your attention and margin capital on your winners you are going to make a lot of money. You should fear losing more than you fear death and you should love winners more than you love life.
Withdraw some of your profits
When you make money by using leverage you should withdraw some of the profits for your own personal use. This is good for a couple of reasons. First, it makes you inspired to keep trading and keep fighting the markets since you get to enjoy what you have earned. Secondly, removing some funds from your account saves you from spending it which is sort of a risk management tool.
Don’t withdraw too much capital however, you don’t want to downscale your account. Withdraw 10-20% of your monthly earnings and put it away for savings or spend it on something nice. I always found eating a good dinner with my friends or family to be a very good treat when I earned money in the markets.
Never pick tops or bottoms
Picking tops or bottoms is a fool’s game. You might not realize it at first but what you are essentially doing is betting against the whole market. Tops and bottoms are very difficult to predict and if you look at the probabilities you are always better off going with the market than against it, especially when you are working with leveraged positions.
Even if you manage to hit a bottom or a top it is not sure that the market will turn around and create a new trend. It also takes many attempts for you to get into the position and this will cost you a lot of money and trading commissions. So, instead, trade with the market and don’t try to outsmart the crowd.
Short-sell only when the market is in free fall
Short-selling is incredibly difficult, it just is. Many traders have tried and failed at short-selling the markets and it doesn’t matter what market it is, it’s always difficult. This has something to do with the that most people are biased in a positive way and when you bet against a market, even in the short term, it creates an internal fight.
If you decide to try short-selling you should only do it when the market is in a panic sell-off. This is the best time to utilize the short-selling tactic because during a short period of time there are more sellers than buyers in the market and you are likely to have a higher probability of being right on the trade.
Common questions and tips
For beginners, I would recommend not using more leverage than 1:10 and for experienced traders not more than 1:50. This is due to the risk profile of your position. Once you add more than 1:50 times leverage, your liquidation point shrinks to less than 0.20% and you are going to have a lot of trouble timing the market.
Yes, if you know how to correctly use your margin capital it can be a great tool to increase your profits.
If you only add margin funds to your winners and cut your losers fast you are able to trade more profitably with leverage.
Never use more than 1:10 leverage if you are a beginner. This will keep you from overtrading and you will still have a decent liquidation level. More leverage will increase the risk significantly. It also depends on which market you trade. If you trade the crypto market I would not use more leverage than 1:5.
No, not really. You always control the size of your position. Leverage simply gives you the option to take on bigger positions, but you don’t have to. You can open a position of $1000 with or without leverage where the only difference is how much of your own capital you are putting down.