High Leverage and Margin Trading Strategies
High leverage investments such as forex, futures, and options trading carry with them a significant amount of risk. Still, many investors choose to accept the hefty amount of risk associated with these high leverage investments because ultimately the reward can outweigh the risks. People choose to take on the additional risks related with leveraged trading because the payoffs can significantly alter the lifestyle of the winners – whereas normal investments offer little gain for small capital investors. Consider a brief look at some of the pros and cons of each of the most common strategies.
Forex- Although it gets all the press and appears the sexiest investment vehicle going, forex trading has some great disadvantages as well. Consider that no matter how much capital you have to put in play in the market, there is always someone bigger out there and better financed. Think of currency markets as a room full of bullies and every last one of them is out to steal your lunch money. Imagine further that you each have to stay awake and alert for 24 hours a day, 5 days a week while the market is open. Eventually, one of the bullies is going to take you out – either while you sleep or by just plain muscling you out. Remember – this is a zero sum game.
Futures Trading – The futures market is less demanding than the continuously traded currencies arena yet the trades are still done on margin – meaning constant monitoring of positions is required. If the equity in the assets held falls below a certain level determined by margin requirements then your broker takes control of your account and starts selling assets to raise the equity in the account. The problem with this situation is that your broker does not particularly care how you price those asset sales. Your brokerage firm can sell assets from whatever suits their needs.
Options Trading – Personally I prefer high leverage investments made with stock options. While these particular trades may not always be the most liquid, there is no margin requirement when going long normally and losses are limited to the amount of capital invested. Further, gains and leveraged positions are custom designed – each position held is unique and no bullies can push you out of the market before you are ready to sell.