• Skip to primary navigation
  • Skip to content
  • Skip to footer

Daniels Trading

Independent. Objective. Reliable.

Top Navigation

  • Open an Account
  • Request Trading Demo
  • 1.800.800.3840
  • Sign Up
  • Log in

Primary Navigation Menu

  • About
    • Who We Are
    • Services
    • Careers
    • Risk Disclosure
  • Trade
    • Broker-Assisted
    • Self-Directed / Online
  • Hedge
    • DanielsAg Mobile App
    • Ag Marketing Plan
    • WASDE Analysis
    • Grain Resources
    • Livestock / Dairy Resources
    • Hedging Videos
  • Invest
    • Automated Strategies
    • Managed Futures
  • Advisories
    • GENERAL / FUNDAMENTAL
      • DT Newsletter
      • Insider Market Advisory
      • Capture the Move
      • Turner’s Take Newsletter & Podcast
    • TECHNICAL ANALYSIS
      • The Cullen Outlook
      • Market Dimensions Advisory Room
      • Rath Overlay
      • Swing Trader’s Insight
      • Trade Spotlight
    • AG MARKETING
      • Cattleman’s Advisory
      • The Swine Times
      • Technical Ag Knowledge
      • This Week in Grain
      • Turner’s Take Ag Marketing
    • THIRD-PARTY RESOURCES
      • CFRN
      • Market Action Scanner
      • Moore Research Center, Inc. (MRCI)
      • OptionWorks®
      • TASMarketProfile.com
  • Education
    • CME Group Resource Center
    • Guides
    • Frequently Asked Questions
    • Order Entry Handbook
    • Webinars
  • Blog
    • Futures 101
    • Ag Marketing
    • Tips & Strategies
    • Trading Advisories
  • Resources
    • Trading Software
    • Quotes and Charts
    • Futures Calendars
    • Contract Specifications
    • Margin Requirements
    • Futures Calculator
  • Accounts
    • GAIN Capital Futures
    • R.J. O’Brien
  • Contact
 

Avoiding the Dangers of Futures Leverage

May 7, 2018 by Daniels Trading| Tips & Strategies

TwitterFacebookGoogle+LinkedinEmail

Online futures trading is an appealing pursuit for people keen on maximizing the potential of their own venture capital. Each day, market participants around the globe buy and sell a wide-variety of futures products in an attempt to grow personal wealth. The implementation of financial leverage plays a key role in the eventual outcome of every transaction.

In elementary terms, leverage is the process of using a little to control a lot. Just as a crowbar and fulcrum may be used to move an enormous object, futures leverage allows a small amount of capital to control an asset with a much larger value. If used appropriately, leverage gives retail traders a chance to engage the futures markets side-by-side with institutional participants.

Register for our upcoming webinar Chart Analysis 101 to learn about technical  indicators in futures trading>>

The Impact of Futures Leverage

As the old adage goes, financial leverage is a double-edged sword. This statement may never be truer than in futures trading. Increasing the leverage for a trade will certainly bolster gains — or losses.

The single most important thing to remember about futures leverage is that it increases market exposure exponentially. As the number of contracts applied to a position is raised, risk and reward grow dramatically.

For instance, take a look at how fast the stakes go up when the degree of leverage is raised in the WTI Crude Oil futures market:

Number of Contracts Margin Requirements (Intraday) Value Per Tick
1 $1000 $10
2 $2000 $20
3 $3000 $30
4 $4000 $40
5 $5000 $50

It is not difficult to see the relationship between increased leverage and risk exposure. Buying or selling one lot in WTI crude oil has a per tick cost of $10, while a five lot is $50. This is a five-fold increase in market exposure.

Even though reduced margin requirements enable traders to boost returns, it’s easy to take an untenable position given available capital resources. A proper understanding of margins, tick value and inherent product volatility are crucial to using futures leverage properly.

Applying Leverage: How to Avoid Catastrophe

Many pitfalls and challenges jeopardize the longevity of a futures trading account. Unexpected pricing volatility and improper money management are two of the largest. Although market participants cannot directly control volatility, employing sound money management is in the job description of every trader.

Here are a few basic guidelines that will help minimize the chance of prematurely blowing out your trading account:

  • Don’t overextend: Position sizing is an integral part of applying leverage properly. Taking an abnormally large position in the market may result in a violation of margin requirements or lead to account liquidation or an extraordinary loss.
  • Respect volatility: Each product displays unique behavior. For instance, markets such as the E-mini S&P 500 and WTI Crude Oil trade with varying degrees of volatility and become active at different times. When increasing leverage, be sure to understand the product-specific tendencies of price action.
  • Balance risk and reward: Aligning risk to reward is one of the most important aspects of futures trading. Leverage amplifies both of these elements, thus playing a key role in any money management strategy. If a position is too large, stop losses may have to be exceedingly tight, and if it’s too small, returns on premium trades lag. Balancing risk and reward can be a challenging task, but one that is absolutely necessary to optimize performance.

Perhaps the most effective way to avoid the dangers of futures leverage is to clearly define its role within your comprehensive trading plan. By quantifying the risk associated with increased leverage thoroughly, money management decisions become routine.

Getting Started

The futures markets are fast-paced environments where assuming risk is a part of day-to-day operations. Being aware of when to increase or decrease the use of leverage is critical to employing your capital efficiently.

For more information on how to become involved with futures, consult the industry professionals at Daniels Trading. With more than 20 years in the market, Daniels Trading has the experience and resources to help you achieve your trade-related goals.

Chart Analysis 101 webinar

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

Subscribe To The Blog

Footer

Trustpilot

Contact Us

Daniels Trading
100 South Wacker Drive, Suite 1225
Chicago, IL 60606
+1.312.706.7600 Local / Int'l
+1.800.800.3840 Toll-Free
+1.312.706.7605 Fax

Connect with Us

Site Navigation

  • Frequently Asked Questions
  • About Us
  • Customer Reviews
  • Contact Us
  • Futures Blog
  • Open a Futures Trading Account
  • Media Resources
  • Fund Your Account
  • Legal Notices

Copyright © 2019 · Daniels Trading. All rights reserved.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

  • Risk Disclosure
  • Privacy Policy
  • Terms of Use
  • Back to top