What are the risks of margin trading?
While margin trading can increase your profits, it can also lead to amplified losses. That’s because your profit or loss is calculated using the full value of the position, not just the margin. If the market moves against you, it is important to be aware that your losses could exceed your initial outlay.
Let’s take our above example. If your $1000 worth of shares rose to a value of $1200, then you would have made $200 – double your initial outlay. But if the shares had fallen to $800 instead, then you would have lost $200, again double what you originally put down.
However, there are numerous ways that you can manage your risk and limit your potential loss. Stops and limits, for example, will automatically close out your trades at the level you decide – preventing running losses, or locking in profits.