“话虽如此，我仍不建议散户去猜测最低点。宁愿等到市场企稳后再入场，即使买贵一点，也不要急着接一把正在落下的刀。”
“I would rather enter after the market has stabilised, even if it means paying a little more, than rush to catch a falling knife.”
There were actually so many useful angles packed into Lianhe Zaobao 联合早报 Business Journalist Sierra Zhang（财经新闻记者 张仕婷）'s comprehensive piece on leverage that I thought it deserved another post. 😃
One of the points we touched on was the temptation to try to catch the lowest point.
After a sharp correction, something can suddenly look very cheap. But trying to pinpoint the absolute bottom is another matter altogether.
Cheap can always get cheaper.
And when leverage is involved, getting the timing wrong becomes much less forgiving.
Another point that is sometimes misunderstood is what actually triggers a margin call.
It is not necessarily one big market drop that causes the problem. Often, it is the 𝐥𝐚𝐜𝐤 𝐨𝐟 𝐬𝐮𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐭 𝐛𝐮𝐟𝐟𝐞𝐫 in a leveraged position. Without enough breathing room, even normal market volatility can become uncomfortable very quickly.
There are also important differences between leveraged instruments.
With 𝐃𝐚𝐢𝐥𝐲 𝐋𝐞𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐞𝐫𝐭𝐢𝐟𝐢𝐜𝐚𝐭𝐞𝐬 (DLCs) and 𝐒𝐭𝐫𝐮𝐜𝐭𝐮𝐫𝐞𝐝 𝐖𝐚𝐫𝐫𝐚𝐧𝐭𝐬 (SWs), the maximum loss is generally capped at the amount invested. With margin trading and CFDs, losses can potentially exceed the initial capital or deposit.
Same word, "leverage". Very different risk structures.
Which brings me to perhaps the most important point:
𝐋𝐞𝐯𝐞𝐫𝐚𝐠𝐞 𝐢𝐬 𝐧𝐨𝐭 𝐟𝐨𝐫 𝐞𝐯𝐞𝐫𝐲𝐨𝐧𝐞.
Before using any leveraged instrument, it is important to understand how it works, what can trigger losses, how much can be lost, and whether that level of volatility fits one's own risk tolerance.
A big thank you again to Sierra for putting together such a comprehensive and thoughtful piece. She managed to bring together the mechanics, psychology and risk management of leverage, while making a fairly complex subject accessible to everyday investors.
Leverage can magnify returns.
𝐁𝐮𝐭 𝐤𝐧𝐨𝐰𝐢𝐧𝐠 𝐰𝐡𝐞𝐧 𝐍𝐎𝐓 𝐭𝐨 𝐮𝐬𝐞 𝐥𝐞𝐯𝐞𝐫𝐚𝐠𝐞 𝐦𝐚𝐲 𝐛𝐞 𝐣𝐮𝐬𝐭 𝐚𝐬 𝐢𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐭 𝐚𝐬 𝐤𝐧𝐨𝐰𝐢𝐧𝐠 𝐡𝐨𝐰 𝐭𝐨 𝐮𝐬𝐞 𝐢𝐭.
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