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Leverage - When I use it

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For those of you that follow my social media, you will have seen at the end of last week that I posted a screenshot of 4 Trades that i had opened a few days prior using my Brokerage CFD Account. These Trades were highly leveraged and therefore they quickly accumulated profit over the course of a few days and it resulted in a healthy $8,400 profit on the companies NVIDIA and FACEBOOK.

The question I will attempt to answer in todays blog is - When is it appropriate to use leverage?

Before answering this question, I should say that it taken me a LONG time to figure this out on a personal level, as it requires patience and a sound understanding of the Technical side of Trading (Moving Averages / Support / Resistance) as well as a deep understanding of the key price levels (which on this occasion was the basis for my entry into the market using Leverage)

For me, Leverage should only be used in favorable market conditions, and In my opinion should be used incredibly sparingly as it is VERY easy to get addicted to the big wins (as I've found to my cost in the past), but by limiting the number of times you use Leverage, you will never fall victim to one of the biggest mistakes a Trader can make, and is a surefire way to blow your account - and that's OVER TRADING .

To use Leverage reasonably safely (i use the word reasonably as it obviously still carries a lot of risk) - I will only employ it - if the price has cleared a key price level (in NVIDIA's case I waited for it to clear $180 and then added to my position again once it cleared $190) and also when placing this trade - i required it to meet 100% of my Market Conditions rule set. (which might only come around a couple of times a month) - there is no compromise on this - It needs to meet ALL of my rules - and finally, at the 1st opportunity - I will move my stop loss up to the entry position - thereby making the Trade risk free.

By making the Trade risk free early - what I am essentially doing is ensuring that if the price continues to run, then it will only be profit that I make, and the chances of the price gapping down and causing a large loss is minimized - this tactic has proven to be very effective for me, and although yes, I have taken small losses by having tight stop losses - the large wins over time have proven to give me a 10 fold increase in profits - thereby justifying my use of leverage.

I also have a rule where I will only keep Leveraged Trades open for 1 week, and I never allow them to run over a weekend - this rule actually cost me alot of money this week in the case of NVIDIA as it is now trading $197 (i exited at $192) - but by having this rule in place, I am not at the mercy of adverse weekend news (like Trump opening his mouth or Korean conflict etc) and over time - again, this has proven to be a profitable tactic for me.

Capital Protection should be the priority with Leverage, and by protecting your capital, you will always see an account grow (never decrease).

You might be asking yourself after reading this blog - well what's the rule set you have - why the hell have you not told us ALL of your rules? Well, I suppose that's like asking the chef for the secret family recipe.

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Sam McCallumComment