trading with leverage without risking more than your margin?

[Micky89]

Hi,

Is it possible to set a stop loss so that when you're trading with leverage, it makes it impossible to owe more than your deposit?

Say I have £100 deposit and use leverage to enable me to trade £500. If the market goes against me could I not set a stop loss so that I can only lose £100 and nothing more, whilst increasing my earning potential five fold?

Cheers guys.

 

[Micky89]

Also, if the margin on a leveraged natural gas ETF is 25%, how would I actually use the leverage? For example, when I usually trade I buy quantity 2 which works out to be £2 per point. My main is usually at about £50 and my trading resource is whatever funds I have in my account apart from any open losing positions.

So how do I use said leverage? How would it work? How much per point would it be? Would I just say, buy quantity 8 and still only need £50 margin? And any point increase our decrease would then be £8?

Sorry!

 

[timsk]

Hi Micky,

Is it possible to set a stop loss so that when you're trading with leverage, it makes it impossible to owe more than your deposit?

This is tough to answer as, IMO, it depends on a number of variables:
1. The first being the trading vehicle you're using, i.e. spread betting, direct market access or options etc. If you're using spread betting, then many firms offer guaranteed stops which, if used, will ensure you never owe more than your deposit.
2. Your choice of broker and the type of account. In theory, if you open a margin account, then the scenario of owing more than you deposit is unlikely as you'll receive a margin call from the broker when funds are low. If you fail to deposit more funds, then their software will close your trade(s) before the whole account blows up. In theory, the same doesn't apply to credit accounts, as your broker can continue to lend you money to cover your losses. How the latter actually works in practice I don't know - as I've never had a credit account.

Say I have £100 deposit and use leverage to enable me to trade £500. If the market goes against me could I not set a stop loss so that I can only lose £100 and nothing more, whilst increasing my earning potential five fold?

In theory, yes you can. In practice, setting your stop loss at a level that wipes out your entire account on a single trade is completely unworkable, as it will get hit - probably sooner rather than later!
Tim.

 

[mike.]

if spreadbetting, There is a information ticket on the platform which denotes "minimum margin required" for the selected instrument, i.e. for example : Dax, minimum stake £1, minimum margin required £30, You cannot open a trade unless you have sufficient funds to cover the margin.

Most s/b companies, the position should automatically close out should it fall below a certain level protecting you from a negative balance. ( im not 100% sure whether this level is, once it falls below the minimum margin or when the account hits zero )

Also, market gapping, if the traded instrument gapped below zero, wiped out your account and a "guaranteed stop" was not used, then you would owe them the difference, hope that makes sense.