If you are trying to understand what is leverage in trading in India and how it works, you have come to the right place. I will explain leverage trading and its various aspects in this beginner's guide. Besides, I will explain the pros and cons of Leverage trading. It will be a comprehensive post on Leverage trading for beginners and experts.
What is Leverage Trading?
Before we jump into Leverage trading, let me help you visualize how trading works in the stock market. It should not be difficult to understand. You buy a certain quantity of stock at a specific price and square it off at a higher price. That way, you make profits. However, you make losses if compelled to square off your position at a lower price than the actual price. Besides buying, you can also sell a stock first and buy it later in Intraday, as in Short selling.
While you don't want to multiply your losses, you can multiply your profits by increasing stock quantities. This is where Leverage trading comes into play, and you can multiply your profits without paying any extra penny from your pocket. You can get leverage up to 5x. leverage from a broker on both delivery and Intraday in India. However, leading brokers like Zerodha and Upstox only offer the leverage trading feature on Intraday Equity.
Leverage Trading: Pros and Cons
Leverage Trading is a powerful feature of retail traders. However, it has pros and cons. While you have a chance of making more profits with leverage trading, you also have the risk of more losses. Hence, you must go for it after being really sure of the risk. In Equity Intraday, the price movement is not much, and you can convert your small profits into big profits with the power of leverage trading. Losses can get big as well, even though nobody wants losses.
Factors to consider while choosing leverage trading
Now that you know how leverage trading works and the risks it involves, it's time to walk you through the factors you need to consider for choosing leverage trading. Here are a few things to bear in mind:
Before you can go ahead with leverage trading, you need to have good money management in place. By money management, I mean you need to determine your maximum daily loss and profit. The next best thing you can do is decide on your maximum daily trades, which will be based on the maximum daily loss and profit. Once you determine your maximum daily number of trades, you must ensure you never violate it at any cost. On days when things don't go your way, and you feel really frustrated, it can eventually force you to take more trades. However, when you have a money management plan in place, it will prevent you from over-trading and further losses on such awful days.
We can't rule out the significance of analysis in trading. Before entering a position, you must do a proper technical analysis of the stock by going through the historical data of the stock on the chart. For this, you need a decent knowledge of price-action and indicators. Besides, you need to have a well-tested trading setup.
Indian and Global Market News
Indian and Global Market News also greatly impact Equity prices. Hence, you must cultivate a habit of tracking market news on a constant basis. It will help you accurately predict the price's direction and avoid heavy losses.
Events such as Budget, RBI, or Federal Reserve announcements can make prices highly volatile. Hence, it's always wise to avoid trading on any event day, or you must consider trading after the event is over.
Leverage trading can be very effective for retail traders with proper analysis and money management. I have provided you with all the essential clarity on leverage trading. I have explained how it works and also made you aware of its pros and cons. Further, I have described the factors you must consider while choosing leverage trading.