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Houston TX
Legendary Market Wizard
Experience: Advanced
Platform: TT and Stellar
Broker: Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
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There could be a margin charge, if so the more margin you use the greater the charge.
Leverage in itself is not a bad thing. How you use it, is what you need to be careful off.
Example
Case A.
I have 100 in cash, I buy something at 100, with noleverage.
I now have 0 in cash, and whatever I bought at 100.
It goes down to 99 and I sell it losing 1.
I now have 99 in cash and lost 1% of my cash on a 1% move in the underlying.
Case B.
I have 100 in cash, I buy something at 100, on 2:1 leverage.
I now have 50 in cash, and whatever I bought at 100.
It goes down to 99 and I sell it losing 1.
I now have 99 in cash and lost 1% of my cash on a 1% move in the underlying.
Not that A and B are the same, even though you used leverage, because your gross exposure is still the same.
Case C.
I have 100 in cash, I buy 2 of something at 100, on 3:1 leverage.
I now have 33 in cash, and two of whatever I bought at 100.
It goes down to 99 and I sell it losing 1 x2 = 2.
I now have 98 in cash and lost 2% of my cash on a 1% move in the underlying.
Case D.
I have 100 in cash, I buy 9 of something at 100, on 10:1 leverage.
I now have 10 in cash, and nine of whatever I bought at 100.
It goes down to 99 and I sell it losing 1 x9 = 9.
I now have 91 in cash and lost 9% of my cash on a 1% move in the underlying.
C and D lose more than A and B because your gross exposure is now greater.
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