In the world of trading, leveraged products such as Contracts For Differences or CFDs as well as ordinary shares, may have taken a hit during the GFC or global financial crisis of 2007 to 2010.
The temporary ban on short selling stocks during falls in prices, which means a loss for long positions or some long term trend followers, may have had many people shy away from trading.
Here’s a new page here on trading contracts for differences and what pitfalls to watch out for.
The main point here is the use of leverage.
When used conservatively and wisely, it can magnify results.
But when overused, it can cause a large drawdown of course and large losses!
When the market is rising well and booming, many people used leverage excessively and rode the stocks up. But what happens if the market turns down? If this happens and you are maximally leveraged then the drawdown can be very high.
This is why it’s important to decide how much of the available leverage to use.
Just because there is 5 to 1, 10 to 1, or whatever leverage is available doesn’t mean that you should use it all.
If you do, margin calls may occur.
And when margin calls occur, and you can’t meet them, you may have to close some positions at a time that is not ideal.
So this is where proper money management and rules about trade sizes and number of trades come in.
With contracts for difference, which allows the use of leverage and margin, this should be thought of before trading.
As the market changes, people come into the market where they have not been in before.
Just make sure that you know how to handle leverage and have a trading system or strategy that is solid.