Leverage is a term that is thrown around a lot in conversations about binary options online trading, largely with reference to bonuses. Don’t know what leverage is? Here are several definitions from the internet:
- Leverage in physics is the exertion of force by means of a lever or similar object to cause another object to move. The leverage allows you to exert more force than you would be able to on your own.
- In investing, leverage is the use of borrowed capital to generate profits which would be greater than those which you would be able to generate on your own. In this definition, the borrowed funds play the same role as the lever in the physics definition. Your goal however is not to move an object; it is to generate growth in your account.
- A general definition of leverage is: use something to maximum advantage. This last definition can apply to any sphere of life, whether we are talking about investing, physics, politics, personal relationships, or anything else under the sun.
When we talk about leverage with reference to trading, we are typically talking about the investing definition of the word. And in the case of binary options online trading, that means we are discussing bonuses. A bonus is a sum of money that your broker loans you to trade with. While bonuses are usually referred to as “,” most brokers have terms which limit the use of your bonus money to trading until you achieve a particular volume turnover in your account. After that you can claim the bonus as cash.
There is a similar concept in Forex trading which is referred to simply as “trading on leverage.” In FX, if a trader trades on leverage, he or she borrows a set amount from the broker to place higher trades. This allows the trader to trade as if he or she had a much larger account. Bonuses allow you to do exactly the same thing.
Bonuses as Leverage
Imagine you deposited $500 into your binary options online account to trade with, and accepted a match bonus of $500. In your account, you will see that the status of your bonus at that time reflects the fact that you have not done any trading yet. It exists as leverage only, and not as cash. You are however free to trade with it. You only own $500, but you have the option of controlling $1,000 when you place your trades.
Now let’s say you have absolutely no appreciation for what it means to manage your money responsibly. You can theoretically trade more money than you actually possess. If you want, you can invest $600 on a binary option, or $700. If you are lucky enough to win your trade, you will have more than doubled your account with a single trade.
Of course, that means if you lose your trade on leverage, you lose your entire account. Just like that, you are out of the game. If however you were lucky and were able to stay in the running, you would eventually be able to count the bonus money as cash. But only after you traded the volume of the bonus 20 to 40 times (it depends on your broker). Twenty times $500 is $10,000. That is a lot of trading before you own that money.
The bottom line here though is that bonus money is a double-edged sword. Trading on leverage can cause your account to grow by leaps and bounds … or cause it to close overnight. While you might think this means that your fate is entirely up to luck, you are actually tilting the odds against yourself by trading this way. Why? Because trading on leverage is irresponsible for the vast majority of traders. It means investing more than you can really afford on your trades. When you trade irresponsibly, you are inviting your own downfall.
But what about those other definitions of leverage we discussed? Are there ways you can trade on leverage without endangering your account, ways that do not involve bonuses? What other factors can you turn to your maximum advantage? What assets do you have on your side which you may not be utilizing fully?
Empower Yourself with Real Leverage
Instead of trading with a bonus, why not leverage other things to your advantage? Here are some types of leverage you may have which you do not even realize you possess:
- Your demo account. Your demo account is a wonderful learning tool, and it gives you real leverage in the sense that you can only use it to your advantage. By definition, there is nothing you can lose by demo testing. No money is on the line. “But what can I gain if I am not trading real money?” you might ask. What you can gain is priceless knowledge and experience of trading which you can then use to make real money. Taking advantage of all opportunities you are given to test before going live with trading is one of the best forms of real leverage you are going to find.
- Free software. There is some very good charting software which is available for you to use for free. With this software, you can plot indicators and study trade setups in detail. You are actually quite unlikely to succeed as a trader without using this software, so you really should leverage it to its fullest advantage. How many businesses can you start up where you are given the tools you need for success for free? Not too many. This is one of the unique benefits of trading, so get set up with your charts if you have not already done so.
- One of the most valuable assets which you can leverage to your advantage is the experiences of your fellow traders. Any lesson that someone else can teach you is one you do not have to learn the hard way. Read trading articles and blogs, and learn all you can about trading every day. Keep up with publicly posted trading journals. Money that somebody else loses learning a lesson is money you do not have to lose repeating their mistakes. Think of all the years of experience which you can turn to your advantage without actually spending all that time doing the hard work.
- The kindness of others. Many traders are willing to share their strategies with you, either through eBooks and articles, or through trading forum threads, or through word of mouth. Get to know your fellow traders, and leverage their knowledge and kindness as well as their experiences. There is nothing to lose with this advantage, and everything to gain. You may even gain more than profits. You might even make a few new friends.
- Your own strengths. Get to know yourself as a trader and as a human being. Figure out what your greatest assets and talents are. Everyone has natural gifts. Once you discover yours, you will be able to choose trading strategies and situations which allow you to leverage your personal talents to their fullest benefit. The most successful traders are those who find ways to overcome their weaknesses and utilize their strengths effectively.
Bonus money is not something you necessarily have to avoid completely. There are traders who trade on leverage and do fine, but they are a very narrow band of traders. Almost everybody who trades successfully over time trades without the use of leverage, and only invests a small percentage of their account on any one trade. Bonuses are also fine to use if you are trading just for fun, and you do not care if you win or lose. It can be thrilling to put that much money on the line, and to be able to play with money you do not have.
But for those traders who are serious about making a profit and staying profitable, bonuses are largely offered up as a temptation. And this is a case where you should resist temptation. Leverage is something we are all looking for in life. We all want to find something that can make our lives easier and more lucrative. But there are other types of leverage which are much healthier for your pocketbook than bonuses, and which can make your trading more effective.
Bonuses offer you advantages, but more than make up for them with ample disadvantages. When you leverage the experience, knowledge, and kindness of your fellow traders though, you are setting yourself up to win. And when you leverage your demo account to learn how to trade without risk, you are maximizing your advantages fully while minimizing your disadvantages. And that is what real leverage is all about.