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How Trading Leverage Can Produce Extraordinary Gains

May 13, 2019 by Daniels Trading| Futures 101

Futures trading is a unique discipline. There are no time clocks to punch, 401ks, or employee health insurance policies ― your success depends upon how well you use all available resources. Simple as that.

Trading leverage is a big part of maximizing your financial potential as a trader. If you’re seeking massive returns, then the flexibility of futures may be an opportunity you can’t afford to miss.

Leverage Is Truly a Double-Edged Sword

Virtually all trading literature warns against the perils of leverage, and rightfully so. Losing a large amount of money can be an incredibly negative experience that affects a person’s financial well-being and physical health.

However, there’s an upside to leverage ― traders can use it to produce extraordinary gains. In futures, trading leverage is an essential part of the business and a primary reason that people from around the globe enter the marketplace.

As a derivative product, futures contracts offer traders a unique application of financial leverage. In fact, they feature several characteristics not found anywhere else in the capital markets:

  • Low capital requirements: Reduced margins augment purchasing power and are a premier benefit of the futures markets. Margin requirements may be as low as 5%, a fraction of the 50% required by stocks.
  • Liquidity: Traders can quickly and inexpensively convert futures to cash. This feature differs greatly from such hard assets such as real estate, essentially freeing up capital for immediate reinvestment.
  • Flexibility: A trader can take long or short positions in the markets of equities indices, currencies, debt, or commodities. The inherent flexibility of futures furnishes individuals with the ability to leverage risk capital in a vast number of ways.

There simply aren’t many venues where a market participant is able put up a small amount of capital, control a large quantity of a valuable asset, and enjoy maximum liquidity. Due to these attributes, the application of leverage via futures trading is a viable way of realizing large profits.

3 Ways Trading Leverage Enhances Gains

Traders can apply futures leverage in almost infinite ways, limited only by the imagination of the individual. However, no matter which approach you take, responsible money management is a prerequisite to enjoying any of benefits leverage may provide.

Read our guide, Basic Training for Futures Traders, and discover 50 of the best tips from experts.

Here are three ways that the trading leverage of futures can bolster returns:

  • Position sizing: The ease of increasing position size in futures is superior to more conventional investment vehicles. Lower margin requirements allow for enhanced buying power, making it easy to add exposure to long or short positions. Subsequently, the profits from beneficial moves in pricing are increased. For example, Avery the energy trader has a strong bearish bias toward the WTI crude oil market. Being already short one lot of WTI crude oil, Avery decides to sell three more at market, effectively increasing the trade’s per tick exposure to $40. For every cent WTI crude oil falls, Avery’s profitability is now $40 compared to the original $10.
  • Strategic freedom: When trading more than one lot, the added leverage opens the door to a vast number of strategic options. From exiting the market at multiple profit targets to combining scalp and trend strategies, the added trading leverage can enhance gains exponentially. Let’s assume that Avery’s bias has proven correct and WTI crude oil has quickly fallen by 25 cents from average entry. The position is already in the green by $1000, a tidy profit. However, Avery sees no reason to exit the position, expecting more downside in WTI’s immediate future. The added leverage gives Avery the freedom to take off a few contracts and rack profits, while holding the others for larger gains. In effect, the potential rewards from the trade can be huge in comparison to assumed risk.
  • Advanced return on capital (ROC): The leverage available in futures allow for trading accounts to control asset values far in excess of deposits. Due to this fact, returns on positions can be extensive and rapid. This increases the probability of significantly compounding ROC without having to spend years or committing additional funds doing so.

Understanding the Ins and Outs of Leverage

Perhaps the most important thing to know about trading leverage is that it magnifies the intensity of both wins and losses. When things go well, leverage is a trader’s best friend. When they go poorly, the implications can be devastating.

A great place to further your education on leverage is the online educational suite available at Daniels Trading. Featuring expert insights into money management, strategy, and psychology, it’s a valuable resource for anyone pondering how to use leverage in the marketplace.

Ready to think like a technical trader? Download our free guide to learn how to identify chart formations and take action when the time is right.

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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