Trading with the leverage definition
Nowadays, trading Forex is becoming increasingly popular and the reason behind it is that the Forex gives you higher leverage in comparison to the stock investment. It is very possible that you might heard of the term leverage’ but you probably might not know the definition and working mechanism and how it affects your bottom line.So, you may be wondering that what does the term leverage really mean and how it can affect your trading?
In this article we will talk about trading mini futures but all this rules and examples we can apply on Forex.
Well, leverage refers to the activity in which you borrow a specific amount of money which is required to invest in something. Usually, this money is borrowed from a broker in the Forex.
The equation for the margin-based leverage is:
MBL or margin-based leverage= Total transaction value divided by the required margin.
Now let we see what is e mini index futures (eminis) :
Facts to Know about T7 E-mini
Though we have come across standard futures contract, many of us may not be aware of Emini. Also known as T7 E-mini, it is basically an electronically traded contract. The unique thing about this is that, when it comes to value, it is just a fraction of the value when compared to a futures contract. While it is possible that such trading might be there in other places, it is perhaps more predominantly present on the CME or Chicago Mercantile Exchange. It covers a wide range of stock and share indices including the big ones such as S&P 500, NASDAQ, and Russell amongst others. Apart from stocks and shares it also covers commodities such and silver and gold and also various currencies including USD and Euro.
Some Important Features Of Emini – how to trade s&p mini futures
As mentioned above Emini types of futures contract are traded mostly in the CME or Chicago Mercantile Exchange. It covers a whole range of things such as commodities, currencies and indexes. It has evolved over a period of time. The first E-mini contract was perhaps signed on Sept 9, 1997. It was based on S&P 500.When we talk about this form of contracts, these are obligated financial deal where the buyer is mandated to by an asset and the seller has to honor his part of the contract. The quality and detail of the asset in question are mentioned clearly. They are also standardized so that it becomes easy to sell and buy in a futures exchange. It also allows for physical delivery of the asset and settling in cash is also permitted.
What is the best Emini leverage, capital and risk ?
E-mini futures, have the lowest day trading margins around $500 with the most brokers. That means that the trader only needs $500 in the account to buy/sell one E-mini S&P 500 contract.
Each tick movement in the E-Mini S&P 500 is worth $12.50.
Based on the 1% rule, that good trader can risk at most 1% per time, the minimum account balance should, be at least $5,000 to trade Emini futures !
Benefits of E-Mini
If there is something new in the stocks and commodities market being tried out, there must be some associated benefits that are a part of such a move. When it was first started, there were skeptics who as usual were not too happy about it. However, with time it started becoming quite popular. This is because the value of all full-sized S&P 500 contracts started to become too big and unwieldy for small traders. Since the value was just one-fifth of the full-sized contract, it started becoming popular among small traders in particular. It was only a matter of time before it started become popular and it reached new avenues of success. It has grown in number and size over the past three decades and today there are scores of e-mini contracts. They cover a number of commodities, currencies and indexes. While e-mini is open to other stock exchanges and bourses, S&P 500 still continues to be the place where it is used very prominently and regularly.
How Does it WorK?
As far as daily settlements are concerned, it works the same way as that of regular size contracts. However, there could be some small variation because of rounding of fractions. However, as mentioned above, the average size of these e-mini contracts are around one-fifth of the regular contract. Hence, five e-mini contracts will be equal to one big normal contract.
They are very much in demand for small and active traders because of some obvious reasons. Round the clock trading is possible. More importantly, the low margin rates, liquidity and even volatility are a few more reasons as to why they are becoming as popular as they are.
1. What is the greatest mistake or fault new traders make?
2. What is the essential quality of highly successful traders?
The answer on both questions is related with risk and leverage !
It is an interesting but the not surprising fact that the success of the reader is directly related to their understanding and ability to use leverage effectively.The unsuccessful traders were never able to fully understand the real leverage of their account. On the other hand, the successful traders know the leverage of their account and also the risk of ruin. Many traders may be surprised with this answer but yes, besides having a good trading plan, and choosing correct direction of the market, the most important thing is properly using your leverage. Because, if you are not able to understand how to use leverage, then you will face trouble in trading sooner or later..What are the most common mistakes and the examples related to the trading with leverage?Some of them are given below:Let’s check them out:
• Using the margin like a guideline to find the position.Majority of the new traders believe that the margin is the required amount of funds available in your account to hold the position. However, it is technically true but in reality, the brokers and clearing firms used margin to identify the high-risk account for debit.
• Over-leveraging:It is one for the most annoying experience for new as well as experienced traders. Assume, the trader chooses correct direction and marketer goes against him temporarily and he is bound to take the losses. When the market gets in its right position, the trader gets profit. In this situation the trader was over-leveraged. ALR or account leverage ratio:The ARL refers to the ratio of the sum of entire contract value for every contract divided by your account’s net liquidity or NL.For example, you have $20000 in your account and you invest in the particular contact trading. The day margin: suppose, the D.M is $500it/contract. It means that you can trade up to 40 contacts at once. ($20000/$500 = 40)Overnight margin or O.M:If the overnight margin is $5525 then you can only hold 3 contacts without getting a margin call.
($20K/$5625 = 3.55)Tick & point value or T & P-value:
For example, in E-mini S&P every tick is $12.5 and every point is fifty dollars($50).
Total contract value or TCV:Each In every contract on E-mini S&P 500 the worth of each contact is $60000 at 1200.00. ($50*1200).
Account leverage ratio or ALR:A 20000 account in the E-mini S&P is in the 3:1 ratio or ($60000/$20000). the golden rule for the ratio is the keeping it under 10:1.
RTR or Realistic Trading Ranges: S&P can trade 25-point range and DOW can trade 250-point range in very volatile days.On any day the market can go against you dramatically and ruin your account completely. That is why the understanding of the trading with leverage and how to use leverage, is so important. Some traders believe that using the stop the account’ can prevent these losses but in reality, your account will have very slow death until you stop it due to frustration.What is the solution to these problems?
• Understand your leverage: Before starting the trading, it is very important for you to figure out how much you can lose or make? And what amount of margin is available. You should consider the TCV or total contract value, volatility and recent trading changes and how you can take advantage of it. If you don’t take it seriously then you will at the mercy of the volatility of the market
.•Using pair trading whenever possible:The use of pairs trading can be very helpful for you. By using the Pairs trading and spreads you can reduce the systematic risk.
• Hedging Systematic Risk: Small caps are better for the short-term investment because it can grow faster in comparison to the large-cap companies. Therefore, in order to get the better profit, you should choose small caps over the large caps for short term investments.
• Selecting you broker:
Whenever you are going to trade whether broker-assisted or online, make sure that you broker knows enough about trading with leverage and how to use the leverage.If your online broker is not available 24*7 or even worse only available through email supports then it will lead you to the losses.Final thoughts:In the brief, the leverage is the essential trait of successful trading and also the main reason behind the failure of many traders. Anyone can choose the correct direction in the trading market but a few can use it effectively. New and novice traders often fail because they don’t understand the importance of leverage in trading with leverage. They often over-leverage the account which may cause the difficulty and it can be very hard to get out of it without getting significant losses.However, if you understand how to use leverage in the trading with leverage then it can be a very gratifying experience. And for the great traders, it is an extremely powerful tool to make profits beyond imagination.
Evan you trade forex or Emini futures like s&p mini futures, your capital need be calculated that you can risk 1% per trade. For Emini traders – $5000 is minimum capital when you want to use emini leverage on the right way! In case, you are in the margin, then you’re in serious risk of end up your account. If you are continuously on the margin call, then trading is not for you and it is better for you to stop it.