Leverage and Shorting: Advanced Techniques for Experienced Traders

Experience and beginner trader needs the Leverage and Shorting technique to be successful in trading. In this regard, leveraging and shorting offer enormous avenues toward amplifying gains and gaining from falling markets in trading. Needless to say, these strategies are not for the faint-hearted. While, if used well, they can really generate tremendous profits, the accompanying risks are very high. In this article, we’ll go through the advanced techniques of leveraging and shorting or short selling combined, catering to advanced traders looking to take their trading game to the next level.

Lets understand the concept of Leverage and Shorting

The best way to describe leverage is: it’s like taking out a loan to make an investment bigger than if you only had cash. You may have $100 and borrow another $900 to invest $1,000 total. If your investment goes up, then you make more money because you are investing more. The other side of this coin is that when it goes down, you also lose more money, since you still owe what you borrowed.

With leverage, traders can hold a much larger position with relatively less capital.

You can Leverage with platform like:

1. Charles Schwab

2. Fidelity Investments

3. FXTM

One can short something when he believes the price of that something is to go down. In shorting, one “borrows” shares of stock and sells them at current price, hoping for its price to fall. Later, one buys the same shares back at the lower price and returns them to the lender, keeping the difference as your profit. But, in case of a rise in its price, you lose because you have to buy back the same at the higher prevailing price of that day/on that day.

Note that, leverage enables you to trade more money than you have, and shorting is a bet on something losing its value. Both are features that enable one to make more money but, on the other hand, may also make you lose more money if things do not move as expected. If you haven’t read other articles on Forex, do well to start from beginning

The outcome of combining Leverage and Shorting

You get a greater magnitude of both the potential rewards that can come from leverage, as well as the usually inherent risks associated with such a strategy, by combining the two concepts of leverage and short selling. This strategy will be of especial benefit in turbulent markets where a strong expectation exists that the prices are about to go down significantly. Let me explain exactly how seriously seasoned and experienced traders can use these techniques together:

Timing: It is all about timing when it comes to using leverage and short selling together. First and foremost, one needs to identify the exact bearish trends by applying different forms of technical analysis together with relevant market indicators. Keep a very close eye on key signals that may indicate a fall, such as moving averages tending to show a continued downward slide, or candlestick patterns showing bearish characteristics, or even any bearish news that could push prices downward, hence forcing them to derail to lower levels.

Risk Management: Consideration of leverage and short selling as high-risk investment strategies makes it absolutely necessary to apply efficient risk management practices. The use of stop-loss orders is always recommended as such orders help limit potential losses that could be incurred in trading. For instance, being short in a stock with 5x leverage entails knowing that a 10% move against a position could theoretically wipe out half of the invested capital. Setting a stop-loss at a well-considered and reasonable level will efficiently prevent catastrophic losses from occurring that might bring very undesirable financial consequences.

Diversification: While it may sound tempting to go all-in, using all of your available capital and swing big with one single leveraged short position, one strategy that has the potential to work well in managing or dispersing your risk among different investments involves diversification. It would be prudent to contemplate going short on several different assets or sectors which are expected to decline, rather than putting all your capital and energy into a single position.

Hedging: Advanced traders typically use more advanced hedging strategies to help protect their leveraged short positions. They can do this by taking a much smaller long position in an asset related to the one that they have short positions for, so as to cushion themselves against losses. In the event of the market moving unfavorably and against the trader’s current short position, such a long position could theoretically come into play to temper or offset some portion of the ensuing financial losses.

Watching Margin Levels: When one opens leverage positions, much attention needs to be paid to levels of margin in use. If the market moves against one’s position, the brokerage may issue a margin call. In other words, one will need to add more funds in their account to compensate for the shortfall or else your position will be liquidated involuntarily. So, this means it is very important to monitor one’s margin level and, if necessary, to take swift action decisively.

Example of Leveraged Short Selling

For this question, assume that you are a well-read and confident trader who feels very strongly that one of the tech stocks is hugely overvalued and is due for an adjustment to lower prices soon. For argument’s sake, let’s say that the current trade price is $200 per share. After analyzing it, you decide to short sell 100 shares of this stock, placing an impressive 5 times leverage over your capital. A position without leverage in that would require $20,000 in capital. However, due to your strategic use of 5x leverage, you get into the position with the much smaller $4,000 investment.

In the scenario where the stock price decreases to $150 for each individual share, you would find yourself with a profit amounting to $50 per share. When you consider the total number of shares involved, this profit translates to a significant overall gain of $5,000. Nevertheless, it’s important to highlight that due to the fact that you utilized leverage in your investment strategy, your return on the original capital of $4,000 is an impressive 125%. However, this percentage should be calculated after accounting for any fees and interest that may accrue on the borrowed funds used in the transaction. Conversely, if the stock were to rise instead to a price of $250 per share, the potential losses you could experience would be substantially amplified. This situation underscores the critical importance of implementing effective risk management strategies to protect your investments.

All this technique are very important if you really want to be a successful trader, likewise some people that give up in some area were they end up blowing off their account. Before getting into applying leverage and other techniques, you have to read about Lot sizes and Pips