# Trading Principles

### **Leverage Explained** <a href="#leverage-explained" id="leverage-explained"></a>

Leveraged Trading allows you to get enhanced exposure to the market without having to pay the total underlying cost upfront. Instead, you only need to deposit a percentage of the full value of the trade to open a position. This initial stake is known as collateral. Trading with leverage magnifies your returns and losses, as they’re based on the full value of the trade:

<figure><img src="https://docs.meridianfinance.net/~gitbook/image?url=https%3A%2F%2F2791058162-files.gitbook.io%2F%7E%2Ffiles%2Fv0%2Fb%2Fgitbook-x-prod.appspot.com%2Fo%2Fspaces%252FznH0wmdBqe8s23j9vKpZ%252Fuploads%252FHSTqEI28Q4pOo6uq5mA2%252Fimage.png%3Falt%3Dmedia%26token%3D3d98f3f8-7267-4142-a3d6-60b5aa040827&#x26;width=768&#x26;dpr=4&#x26;quality=100&#x26;sign=d32f4396&#x26;sv=2" alt="" width="375"><figcaption></figcaption></figure>

The most appropriate degree of leverage for any given trade will be dependent on the degree of volatility of the underlying asset the preferred risk profile of the trader and the anticipated duration for the trade.

### **What is Collateral** <a href="#what-is-collateral" id="what-is-collateral"></a>

When you use leverage trading, you put down an initial deposit to open a position, this is known as [collateral](https://docs.meridianfinance.net/resources/glossary/trading-glossary#collateral). The size of the position that you can open is based on this initial funding deposit multiplied by the size of the leverage that you select. If the trade position, less any fees, remains in profit, then the collateral remains unchanged, however if an open position starts to incur losses, then these losses will be offset against the collateral.

Collateral can be added to an open trade at any point in order to maintain a healthy account position. However, if a situation arises whereby the collateral less fees and losses is less than 1% of the value of the trade then the position will be automatically liquidated and the collateral used to cover the fees and losses on the account. If there is any collateral remaining after deducting losses and fees, then the corresponding amount would be returned to the account.

### **Trading Strategy** <a href="#trading-strategy" id="trading-strategy"></a>

A Leverage Trading strategy is a predetermined plan that helps you to define your entry and exit points, and any accompanying risk-management conditions, such as stop-loss triggers. When utilising a trading plan as part of your wider trading strategy, you aim to create a process in which you can monitor and aim to forecast trade outcomes.

A trading strategy template can help you to define a set of rules to follow for every trade, helping to remove emotions, or irrational responses. This keeps consistency within your trades and can help improve your trading mindset.

### **Risk Management** <a href="#risk-management" id="risk-management"></a>

The first step in risk management is to assess the potential risks associated with a particular trade. This may involve assessing the current market conditions, past price movements, price volatility and any news or events that could affect its price.

Once potential risks have been identified, users should determine the appropriate level of leverage to use when placing the trade. Using too much leverage can result in large losses if the trade goes against the anticipated direction. It is therefore essential to find the right balance between risk and reward.

Another critical aspect of risk management is the use of limit orders and triggers. These are orders that can automatically open or close trades if the price hits a predetermined level. By using triggers, traders can limit their potential losses and minimize the impact of any unexpected market movements. Traders should always bear in mind that, under certain circumstances, triggers are not guaranteed to operate at the predefined level and users should always keep a close track of open orders and collateral usage. Leverage Trading involves continuously monitoring and adjusting positions to account for any changes in market conditions or events. By staying vigilant and being prepared to adjust positions as needed, traders can minimize their risk exposure and increase their chances of success.

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