What Is Leverage?

When trading futures, leverage represents the amount of capital you can control with a relatively small amount of your own money. Leveraged trading gives you the ability to increase your potential profits (and losses) as compared to trading without leverage. Leverage enables you to take a larger position in the market than you would be able to do if you were trading without leverage.

For example, let's say that you have $1,000 to invest in the US 500 E-mini futures contract which trades around $200 per point. Without leverage, you would only be able to buy five contracts. But by using leverage, you can trade up to 10 contracts and therefore increase your potential profits (or losses) by a factor of two.

How Leverage Works

When trading futures, you can get access to leverage by opening an account with a broker. The broker then lends you money to increase the size of your positions. The amount of leverage available depends on the broker and the type of product you are trading. For example, some brokers provide up to 50:1 leverage for certain products. This means that for every dollar you put in, you can control $50 worth of the underlying asset.

The amount of leverage you use will depend on your risk tolerance and trading strategy. Some traders prefer to use higher levels of leverage while others prefer to use lower levels of leverage.

Pros and Cons of Leverage

The main benefit of using leverage is that it allows you to increase your potential profits (and losses). However, it is important to remember that leverage also increases your risk. As such, it is important to understand the pros and cons of using leverage before you decide to use it.

Pros:

• Leverage enables you to take larger positions in the market than you could without leverage
• Leverage can potentially increase your profits

Cons: - Leverage can also increase your potential losses - Leverage can increase market volatility which can lead to greater risk

Strategies for Using Leverage

The first step when using leverage is to understand your financial situation. It is important to consider your risk tolerance and come up with a strategy for managing your risk. For example, some traders use a stop-loss order to limit their potential losses.

Once you have determined your risk tolerance, you can then decide how much leverage you want to use. Some traders prefer to use a low amount of leverage while others prefer to use higher levels of leverage. It is important to keep in mind that the amount of leverage you use will impact your potential profits (and losses) as well as your level of risk.

It is also important to remember that leveraged trading requires discipline. Leveraged trading can magnify both profits and losses and it is important to have a clear plan and understand the risks involved before making any trades.

Conclusion

Leverage can be a useful tool when trading futures if used correctly. It can potentially increase your profits but it is important to understand the risks involved and to have a plan for managing your risk. Leverage can increase the potential for larger profits but it also comes with increased potential losses so it is important to use it responsibly.