(Free) Realistic discussion of the risks and dangers of leverage and margin trading【Japan Stock Trade Secrets】
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Japan Stock Trading Essentials
Using leverage in margin trading carries significant risk.
Leverage is used in FX because of its capital efficiency.
When obtaining investment information, traders will encounter extreme opinions from both ends of the spectrum.
Some say to do it because the capital efficiency is good, others say never to use it.
If you consider how many people have had their lives made difficult by leverage, you can understand how dangerous it can be.
Generally, many people start investing with FX first.
I happened to start with physical (spot) Japanese stocks.
As I was able to increase my investment capital, I also started FX.
What surprised me when I started FX was that you can make easy money, and
you can also lose a lot of money easily.
Some people say you should just set a stop loss, but
people cannot easily place a limit order at stop loss.
If you repeatedly cut losses, you will incur losses at that time.
When placing a stop loss, the psychology is to avoid immediate taking the loss, so
you end up placing it deep away from your entry price, or you end up quickly taking small losses again and again.
And,there are times when the stop loss does not get hitand the price drops without triggering it.
If you break through that price and it drops without triggering the stop loss, despair awaits.
Dangers of margin trading and margin accounts
There are margin trading accounts in stocks that use borrowed money with margin.
Leverage is a mechanism that allows you to hold a larger trading position using a smaller margin.
However, you should understand the following risks:
Amplification of losses:
In leveraged trades, small price movements can rapidly expand losses.
Losses can exceed the deposited margin.
Additional margin calls:
Adverse market moves can cause margin shortfalls, requiring additional margin deposits.
Margin calls:
You may be notified by a brokerage to add margin, and failure to comply could lead to forced liquidation of positions.
Time constraints:
Leverage trading is suited to short-term trading and may not be appropriate for long-term holding.
Lack of knowledge and experience:
Leverage trading requires specialized knowledge and experience. Trading while ignorant increases the risk of losses.
Leverage trading involves potentially high returns and high risk and should be approached with caution.
Risk management and planned trading are essential.
FX high leverage is higher risk compared to stock margin trading
Which one is riskier?
To compare the risks of high-leverage foreign exchange (FX) trading with stock margin trading, keep the following points in mind:
Degree of leverage:
FX trades typically offer very high leverage.
Some brokers offer leverage of hundreds to thousands of times.
In contrast, stock margin trading leverage is usually lower, often around 2x to 3x.
Thus, high-leverage FX trades tend to be riskier.
Price volatility:
The foreign exchange market is very volatile and can move price instantaneously.
This generally means larger price swings than in the stock market.
Therefore, high-leverage FX trading increases the likelihood of large profits or losses from small price movements.
Risk management:
In FX trading, risk management is extremely important.
Leverage positions can cause sharp losses, so proper use of stop orders and risk management strategies is indispensable.
Risk management is also important in stock trading, but FX high-leverage trading requires a more cautious approach.
Market timing:
The FX market trades 24 hours on weekdays, making risk management potentially more difficult.
By contrast, stock markets are generally limited to specific trading hours, making risk easier to control.
In summary, high-leverage FX trading is generally considered riskier than stock margin trading.
Because high leverage combined with price volatility can lead to substantial potential losses, investors should proceed with caution.
Keep in mind that solid knowledge and risk management are essential.