Trading Mistakes: over-leveraging

(Video summary)

How to safeguard your capital in trading

In this video, IG analyst, Axel Rudolph explains how important it is to manage the risks involved in trading. He recommends that traders only risk a maximum of about 3% of their total capital per trade. For example, if someone has £10,000 set aside for trading, they should only risk up to £300 on each trade.

However, he says that many people tend to risk much larger amounts, like £1,000 per trade. Axel emphasises that trading with smaller amounts is really important because most trading platforms only require traders to provide a small percentage of the total value of the assets being traded. The rest, around 95%, is provided by the broker. This allows traders to have the potential for big gains, but it also means that they can lose a lot of money quickly.

Maximising profits and minimising losses

To protect against this risk, Axel recommends that traders think about their capital as a percentage and trade accordingly. Even if someone risks what seems like a low percentage, like 10% (£1,000 in their example), if they lose a bunch of trades in a row, they can end up losing a huge chunk of their capital. For example, if five trades in a row go wrong, the trader would have lost 50% of their capital and would need to make a 100% return just to break even. Axel compares this to gambling in a casino, where consecutive losses can happen. The more someone gambles or trades, the higher the chances of experiencing these kinds of losses.

The main message here is that trading with smaller amounts and managing risk is crucial in order to avoid potentially devastating losses and give oneself the best chance for success in trading in the long term. So, it's really important to be careful and not risk too much on each trade.