Be Careful With Margin Trading

With record numbers of people trading on margin through CFDs and spread betting, it is extremely important not to use all the leverage available which can be tempting but one must resist - as within a blink of an eye your position(s) can be wiped out.

With leverage sometime 100 times for an instrument, especially indices one has to be very careful when trading as the risk/reward is extremely high. It is no joke to say that trading is riskier than visiting a casino. Profits and losses can be far greater trading!

Today’s volatility in the Nikkei Index is an example of how volatile markets can be and how much risk and reward can be on offer. When the Nikkei opened this morning it was the only equity index to open higher amongst Asian markets.

This was due to the continued weakness in the Yen which has acted as the catalyst in driving the Nikkei up 70% since the end of last year. However, the rally in the Nikkei earlier today soon came to an abrupt halt and the Nikkei slumped and the Yen strengthened sharply. Within a few hours the Nikkei had fallen 10% from the high of the day.

The index was trading close to 16,000 and after the market closed, the Nikkei futures were below 14,000. The severity of the fall in the space of 12 hours surprised everyone and for those trading on margin were either very happy or very upset depending whether they were “long” or “short” –the profits and losses were magnified 100 times in some cases.

It is extremely important to always have a large buffer when trading and when trading certain instruments that buffer needs to be large and it is important to use stop-losses as there can be a massive over-shoot as demonstrated with the Nikkei earlier today.