Leveraged Trading

A professional approach to trading FX, stocks on margin, CFDs, spread bets and futures for all traders

Robert Carver

• Verlag: Harriman House
• Jahr: 2019
• ISBN:
  9780857197221
• Auflage: 1
• Thema: Negocios y empresa
• Thema: Acciones

With the right broker, and just a few hundred dollars or pounds, anyone can become a leveraged trader. The products and tools needed are accessible to all: FX, a margin account, CFDs, spread-bets and futures.But this level playing field comes with great risks. Trading with leverage is inherently dangerous. With leverage, losses and costs – the two great killers for traders – are magnified.This does not mean leverage must be avoided altogether, but it does mean that it needs to be used safely. In Leveraged Trading, Robert Carver shows you how to do exactly that, by using a trading system. A trading system can be employed to tackle those twin dangers of serious losses and high costs.The trading systems introduced in this book are simple and carefully designed to use the correct amount of leverage and trade at a suitable frequency. Robert shows how to trade a simple Starter System on its own, on a single instrument and with a single rule for opening positions.He then moves on to show how the Starter System can be adapted, as you gain experience and confidence. The system can be diversified into multiple instruments and new trading rules can be added. For those who wish to go further still, advice on making more complex improvements is included: how to develop your own trading systems, and how to combine a system with your own human judgement, using an approach Robert calls Semi-Automatic Trading.For those trading with leverage, looking for a way to take a controlled approach and manage risk, a properly designed trading system is the answer. Pick up Leveraged Trading and learn how.

Part One: Fundamentals

Chapter One

Types of Leveraged Trading Product

In this book, I cover several different kinds of leveraged products: FX, margin trading of stocks, CFDs, spread bets and futures. In this chapter, I explain how they work and the important differences between them. There is some technical detail, but this is necessary if you’re going to trade safely with leverage.

Introduction to leveraged trading

Before I discuss specific products, I am going to explain the concept of leverage in some detail and introduce certain key features of leveraged trading. Once you understand the general ideas, you will able to grasp the finer details of each product more easily.

What is leverage?

Leverage, or gearing as it sometimes called, is the use of borrowed money to make a bet on the price of an asset. The simplest kind of leveraged trade is where we borrow money to buy an asset, hoping that the price will go up (trading jargon for betting on a price rise is going long).

House mortgages

This is like buying a house with a mortgage. If I buy a house that costs $500,000 and it goes up by 10% in price over the next year, then I will make $50,000. If I am renting the house out, then I’ll also make a rental return. If you can earn $20,000 in rent after paying agent’s fees and maintenance, then the total profit will be a handsome $70,000. In percentage terms, that works out to 14%: 10% from the property going up in price, and a 4% rental yield.

But most people don’t buy houses outright, as only the very wealthy have that kind of spare cash. Instead, I would probably raise a deposit of $100,000 and get a mortgage for $400,000. Sadly, the bank is unlikely to give me the loan for free, I will have to pay some interest. With a 4% interest rate it will cost me $16,000 to service the loan for a year.10

The figures involved are summarised in the following table.

	I begin with $100,000 in cash.
I borrow $400,000	This gives a total of $500,000 in buying power.
I buy a $500,000 house	My starting housing equity is the value of the house, less the outstanding loan: $500,000 – $400,000 = $100,000. For this simple example we ignore any costs such as agent’s commissions or taxes.
After a year I have earned rent and paid interest	I earn $20,000 in rent and pay $16,000 in interest. This is a net return of $4,000.
The value of the house has gone up by 10%	My equity after one year is the value of the house, less the outstanding loan: $550,000 – $400,000 = $150,000. I have made $50,000 profit from the price gain.
	Total profit is $54,000.

Notice that I have earned money from two sources: (i) the difference between rent and interest payments, and (ii) a leveraged gain in price.

Even if prices are unchanged, I make profits because my rent ($20,000) is greater than the mortgage payment ($16,000). This difference between what I earn from owning an asset (for a house, rent) and what I pay to fund the purchase (mortgage interest) is known as carry.

This example is a positive ca...