Complete Guide to Position Trading: Utilizing Capital Allocation, Key Advantages and Disadvantages, Practical Risk Management Techniques

If you want to conduct large-scale trades with a small capital, leverage trading is worth considering. However, the greater the profit opportunity, the higher the risk of loss. This article will explain step-by-step the trading structure through borrowing funds, actual operation methods, and specific management techniques for successful trading.

Understanding the Basic Concepts

In trading markets, leverage trading involves borrowing funds from an intermediary to conduct transactions larger than your original capital. Just like using a lever to lift a heavy object, you can open large positions with a small initial investment. For example, with 1 million won in capital, using 10x leverage allows you to start a 10 million won trade.

Why Trading Results Are Amplified Multiple Times

The most noticeable feature of leverage trading is that both profits and losses are amplified simultaneously. If you trade directly with 1 million won and the price increases by 1%, you make a 10,000 won profit. But with 10x leverage, that profit becomes 100,000 won.

The same applies in the opposite direction. A 1% decline in price results in a 10,000 won loss in direct trading, but a 10x leveraged trade results in a 100,000 won loss. Using 20x leverage, a 5% price increase can yield a profit equal to your entire principal of 1 million won, but a 5% decrease could wipe out all your capital.

This amplification effect applies to both short-term and long-term trading. If you predict the direction accurately, you can maximize profits, but incorrect predictions can lead to significant losses or forced liquidation.

The Core of Margin and Trading Leverage

The margin( or collateral) entrusted to the intermediary serves as a security deposit against potential losses. This amount varies depending on market conditions, asset types, and trading size, and requirements differ among institutions.

Failing to meet margin requirements triggers a margin call, which demands additional funds or forces the liquidation of your position. Therefore, understanding the margin maintenance conditions precisely is essential.

Trading leverage(e.g., 10:1, 50:1) indicates the ratio of actual trading size to the margin. Higher ratios allow larger trades with less initial capital but also increase the risk of loss. Remember that at 50x leverage, a mere 1% price decline results in a 50% loss.

The True Difference Between Principal Borrowing Trading and Self-Funded Trading

The clearest advantage of principal borrowing trading is generating high returns from small price movements. With 1 million won in capital, a 1% increase yields a 10,000 won profit in direct trading, but with 10x leverage, the same change yields 100,000 won.

Capital efficiency is also greatly improved. With 1 million won, you can only create one position directly, but with 10x leverage, you can build ten positions of the same size, diversifying your trading portfolio. Additionally, high-priced assets that are normally inaccessible become tradable.

However, this method has obvious disadvantages. A 10% price decline in direct trading results in a 10% loss, but the same decline in 10x borrowed trading results in a 100% loss, meaning total loss of your principal. Margin calls and forced liquidation make losses a reality, and even small changes can cause significant psychological stress.

Trading only with your own capital results in profits and losses proportional to price changes. Without margin calls or excessive leverage concerns, risk management is simpler. It is especially suitable for long-term holding strategies, and beginners can start comfortably.

The downside is that high returns require substantial capital. Portfolio diversification is also limited by capital size.

Borrowing trading is suitable for short-term strategies like day trading or scalping, and markets with high liquidity such as forex or stock indices. This approach is recommended for experienced traders. Conversely, self-funded trading is safer for long-term strategies and volatile markets, especially if you lack market experience.

Is Principal Borrowing Trading Right for You?

Whether this trading method suits you depends on your risk tolerance, market experience, and current market conditions. You need to be prepared for potential losses exceeding your principal and remain emotionally stable even in large loss or margin call situations.

It is suitable for traders with a deep understanding of market structures, effective risk control skills, and experience trading in highly liquid markets.

On the other hand, if your market understanding is limited, or you find it difficult to endure mental stress from large losses, or cannot afford losses exceeding your initial capital, you should avoid this method. It is also not recommended in markets with high volatility and low liquidity.

Clear Advantages and Limitations of Borrowing Trading

Advantages:

• Large profit opportunities with small capital: visible gains from slight price movements
• Efficient capital utilization: operate multiple positions simultaneously with the same capital
• Improved access to high-priced assets: assets previously inaccessible become tradable
• Easy to implement hedging strategies: construct risk-offsetting positions at low cost
• Portfolio diversification: invest in more assets

Limitations:

• Losses are also maximized: potential for losses exceeding initial capital
• Margin call risk: forced liquidation if collateral is insufficient, locking in losses
• Market volatility risk: large losses from sudden price swings
• Accumulated trading costs: interest on borrowed funds and swap fees can be significant over time
• Psychological burden: simultaneous large gains and losses can distort judgment

How to Control Losses in Actual Trading

Applying systematic management rules can keep risks at controllable levels, even if high.

Predefine stop-loss points: To prevent large losses, set exit points before opening a position. Using automatic stop-loss features helps eliminate emotional decision-making.

Adjust position size: Decide on size according to your capital and leverage so that a single loss does not threaten your entire capital.

Diversify across assets: Don’t concentrate only on one asset or market; spread investments across various assets and markets to mitigate shock from losses.

Continuously monitor market conditions: Regularly check current trends, volatility, and potential risks, and adjust your positions accordingly.

Use profit-preserving orders: Employ trailing stops( to protect gains and respond to sudden reversals.

Choose appropriate leverage: Avoid excessively high leverage. Especially in volatile periods, high leverage can lead to huge losses.

Maintain detailed trading records: Record the rationale for opening and closing trades, reasons, results, and lessons learned to aid future decision-making.

Major Financial Products Using Borrowing Trading

Forex trading: Due to relatively small exchange rate fluctuations, traders aiming for short-term high returns often use leverage ratios of 100x or more.

CFD (Contract for Difference): Profiting solely from price movements without owning the asset, using leverage to conduct large trades with small capital.

Futures: Contracts to buy or sell assets at a predetermined price at a future date, where leverage can generate significant profits from small price changes.

Options: Contracts giving the right to buy or sell assets at a set price, allowing large-scale trades with small initial capital by leveraging.

Conclusion

Leverage trading is a powerful tool to maximize profit opportunities by effectively utilizing capital. However, it also increases the risk of losses, so careful approach is essential. Accurately understanding your risk tolerance, mastering systematic risk management, and reviewing experienced traders’ advice before starting are highly recommended. By understanding the characteristics of borrowing and self-funded trading and choosing what suits your situation, you can develop more effective trading strategies.