With every sudden market movement we see a large number of traders being liquidated. You know, they say that using leverage is like signing your death sentence. To avoid falling into those extremes, let’s see the reality that lies behind the myths and fears of leverage.
This is more of an educational article than an opinion piece, but perhaps one of the most important when it comes to understanding the most crucial concept in trading, which is risk management.
The first thing we need to know is that trading in spot or leverage is the same if we use risk management. That is, a position of 1000 USDT or one of 100 USD with 10x leverage is equal.
So what’s the benefit of using leverage? Firstly, you don’t need to have all your capital allocated on the exchange, thus reducing systemic risk. Secondly, it allows you to increase firepower in some situations.
Therefore, the entry point, SL, and targets will be the same whether it’s spot or leverage trading. In other words, the chart and its analysis don’t change no matter which one we use.
But the concept that truly demystifies leverage as the root of all evils is risk management, i.e., what percentage of our portfolio are we willing to lose. To do this, we must be clear about the position size to control exposure.
There’s no standard percentage here since each investor is unique, and so is their risk tolerance, but we can consider 1% of the portfolio as conservative and 5% as aggressive.
The appropriate risk for each person is the one that allows us to sleep peacefully.
Controlling risk will increase our survival in the market since we will experience losses and bad trades, but the key is to control those losing positions beforehand and none of them should damage us so much.
Finally, one aspect to consider when trading with leverage is the margin required by the exchange for that position, i.e., the money we need to have available to prevent the liquidation price from being too close or above our SL.
So, if we want to have little capital on the exchange, we should take advantage of leverage, but if our intention is to buy and hold, it’s advisable to do so in spot and withdraw it to a cold wallet.
In conclusion, we must be aware that it’s crucial to know our risk tolerance and how to manage it to avoid falling into the mistake of considering spot trading as safe and leverage trading as risky.