How can you use leverage in futures trading to your advantage?
Futures trading is a popular way to speculate on the price movements of various assets, such as commodities, currencies, and indices. However, futures trading also involves leverage, which can magnify both your profits and losses. In this article, you will learn how to use leverage in futures trading to your advantage, by applying some basic technical analysis principles and risk management techniques.
Leverage in futures trading means that you can control a large amount of an asset with a small amount of money, called margin. For example, if you want to buy one contract of gold futures, which represents 100 ounces of gold, you only need to deposit a fraction of the contract value, say 10%, as margin. This means that you can leverage your capital by 10 times, or 10x. Leverage allows you to increase your exposure and potential returns, but also your risk.
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When you have solid confirmations on chart, you can use the levarage for going long or short but chances are you may get one or two legitimate trades a month. For example your wick analysis candlestick patterns strong supply and demand zones great volume, you can even go for naked positions no need to hedge. More clearly, suppose that gold is making continuous red candles like 6-7-8 and suddenly there is hammer at POI with great volume, bounce is definitely gonna take place, you may use your leverage here but experience is needed thou.
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Covered call is best step to leverage your position! If you feel, move is not gonna be a sharp one, but yes move will happen slowly, then going long in futures and simultaneously selling OTM call options will make sense, and even if price doesn't move much in spot, you will still end up generating some returns which we call as alpha.
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Leveraged trading is going long or short on an asset at a fraction of cost w.r.t to original value of the asset. Eg. 1 share of REC costs INR 270. To buy 8,000 shares, you have to pay INR 21,60,000 (8000x270). However, the same futures contract (with 8,000 shares as the lost size) costs approx. INR 4,00,000 (margin). Hence, buying the same qty in the derivatives market requires 'significantly' less money than in the spot market. In this eg., it's over a 5x leverage. Because you have paid less (via futures) wr.t the actual value of 8,000 shares, both your returns and risk will be amplified because the p&l is calculated on the actual contract value and not the margin paid to long or short it.
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El apalancamiento permite a los especuladores acelerar el proceso de ganancias, pero ante una pobre o baja gestión del riesgo de mercado, el apalancamienro es un multiplicador de pérdidas, llevando a traders sin experiencia a perder su inversión. Un apalancamiento 100:1 puede llevarte a perder tu saldo con un movimiento del 1% en contra de tu posicion.
Technical analysis is the study of price patterns, trends, and indicators on charts, to identify trading opportunities and signals. Technical analysis can help you use leverage in futures trading to your advantage, by providing you with tools to analyze the market direction, strength, and volatility, and to set your entry and exit points, stop-loss and take-profit levels, and position size. Technical analysis can also help you avoid emotional trading and stick to your trading plan.
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well, future charts are the derivatives chart, and they can be in premium/ discount during month, based on various factors, hence analyzing spot chart makes sense. as the name suggests its derivatives, hence derives price from cash chart, so why to do analysis on future chart. my take is, do analysis on cash chart and accordingly take trade on future chart. Keep trading simple and easy.
Trend analysis is one of the most important aspects of technical analysis, as it helps you determine the overall direction and momentum of the market. Trend analysis can help you use leverage in futures trading to your advantage, by allowing you to trade with the trend, rather than against it. Trading with the trend can increase your chances of success, as you are following the dominant market forces. You can use trend lines, moving averages, and other indicators to identify and confirm trends, and to spot trend reversals and corrections.
Support and resistance are key levels on the chart, where the price tends to bounce or break, depending on the supply and demand forces. Support and resistance can help you use leverage in futures trading to your advantage, by providing you with potential entry and exit points, and by defining your risk-reward ratio. You can use horizontal lines, trend lines, Fibonacci retracements, and other tools to draw support and resistance levels, and to monitor how the price reacts to them.
Volatility analysis is the measure of how much the price fluctuates over time, and how unpredictable the market is. Volatility analysis can help you use leverage in futures trading to your advantage, by helping you adjust your position size, leverage ratio, and risk management strategy, according to the market conditions. You can use indicators such as Bollinger Bands, Average True Range, and Standard Deviation, to gauge the volatility of the market, and to identify periods of high and low volatility.
Risk management is the process of controlling your exposure and limiting your losses, while maximizing your profits. Risk management can help you use leverage in futures trading to your advantage, by preventing you from overtrading, blowing up your account, or losing more than you can afford. You can use tools such as stop-loss and take-profit orders, trailing stops, position sizing, and risk-reward ratio, to manage your risk effectively, and to protect your capital and profits.
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Assume you are bullish on a stock and have entered the futures position (long) then to utilise the leverage, simply sell far OTM calls. In this way, upto the chosen strike of the option, it's all profits and beyond that it gets offset for option sold. In case, the price doesn't go upto the strike then you get a chance to eat the premium like a rent!
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