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Views: In financial markets there is a tool that provides an opportunity to increase the volume in a deal, and with it the potential profits and losses. When using this tool, you need to understand not only the increased risks, but also all the subtleties of working with it.
What is leverage
Leverage is a tool that allows market participants to trade different types of assets using borrowed funds from exchanges/brokers. Be careful as it increases potential profits, but it also amplifies potential losses. Leverage is provided by brokers/exchanges and allows a market participant to open a trade with, for example, a tenth or even a hundredth leverage for an amount greater than his own capital.
Trading with leverage - how to do it correctly
To use this tool correctly, you need to:
Determine the acceptable level of risk and not to use the maximum leverage without experience.
Set stop losses to limit possible losses.
Control the broker's margin requirements.
Analyze the market before opening positions.
Margin in leveraged trading
Margin is the funds that a trader deposits as a pledge for the possibility of opening a position using leverage. It is of two types:
Initial margin - the minimum amount required to open a trade.
Maintenance margin - the minimum account balance that must be maintained to avoid a margin call (forced closing of positions by the broker).
Positive and negative sides of leverage trading
Positive sides of leveraged trading:
1. Increased profit potential
With leverage, a trader can earn more with less investment. For example, with a leverage ratio of 1:8, even minor fluctuations in instrument prices can bring tangible profits.
2. Accessibility for traders with small capital
Leverage opens up opportunities for trading assets that would otherwise be inaccessible. For example, it is recommended to have a large capital to trade on the stock market without leverage, but with leverage you can operate even with small amounts.
Example:
You want to buy a share of Apple stock at $180. Without leverage with a deposit of $1,000 you will buy 5 shares, and with a leverage of 1:5 you will buy 25 shares.
3. Flexibility in trading different assets
Leverage can be used not only on the stock market, but also on cryptocurrencies, commodity futures and indices.
4. Opportunity to earn on any market
Leverage works both in long and short trades. Therefore, a trader opening a short position (short) can make money even in a bear market.
Example:
Opening a short with a leverage of 1:5 when the price falls by 5% will bring the same profit as a 5% rise in a long position.
5. Ability to hedge positions
Leverage helps to hedge risks by opening positions in different directions at the same time. This is useful to protect the portfolio from unexpected market movements.
Example:
If you already have Solana cryptocurrency on the spot, but you are afraid of its short-term decline, you can open a short position (short) with leverage on futures to offset possible losses.
Negative sides of leveraged trading:
1. Increased risks and the possibility of total loss of deposit
Although leverage increases profits, it also accelerates losses. Even a slight price movement in the opposite direction can lead to the liquidation of a position.
Example:
Without leverage: a 5% drop in price on $1,000 capital → $50 loss.
With 1:10 leverage: a price drop of 5% on a position of $10,000 → a loss of $500 (50% of the deposit).
If the drop reaches 10%, the deposit can be completely liquidated.
2. Margin Call
If losses reach a critical level, the broker may require additional deposit or close the position automatically to prevent a negative balance.
Example:
You opened a trade with a leverage of 1:50. When the market reaches a move against you of only 2%, your deposit may be liquidated or frozen.
3. High commissions and swaps
Leveraged trading often comes with additional commissions:
Spread (difference between prices).
Swap (overnight fee) - commission for carrying a position to the next day.
Broker's commissions for opening/closing positions.
Example:
If you keep a 1:100 leveraged trade on the market for more than a day, the overnight fee may exceed the possible profit.
4. Psychological moments
Trading with increased risk, i.e. high leverage, causes stress and impulsive decisions. Traders may:
Increase risk because of greed.
Close trades too early because of fear.
Make mistakes because of emotion.
What is the difference between leverage for a trader and an investor
1. Purpose of use
Traders use leverage for speculative trading, looking to make a quick buck on short-term price fluctuations.
Investors use it for long-term capital appreciation to buy more assets than their own funds allow.
2. Position holding period
Traders operate in the short term: trades can last minutes, hours or a few days.
Investors hold positions for months or years, counting on asset appreciation over the long term.
3. Leverage size
Traders use high leverage (10, 20, 30 and above) to maximize profits on small price movements.
Investors use low leverage (up to 5) because long-term market fluctuations can be significant and high leverage increases risk.
4. Methods of analysis
Traders focus on technical analysis using charts, candlestick patterns and indicators (RSI, MACD, Moving Averages).
Investors rely on fundamental analysis by studying company financial reports, macroeconomic factors and industry outlook.
5. Risks
Traders are exposed to high risks as the price can quickly go against them, leading to margin calls or liquidation of positions.
Investors face long-term risks such as interest payments on margin loan and the need to maintain margin levels during market drawdowns.
6. Use of Stop Losses
Traders necessarily use stop losses to limit losses in volatile markets.
Investors rarely use stop losses because they expect long-term growth of the asset and can wait out temporary drawdowns.
7. Commissions and costs
Traders face high commissions including spreads, swaps and brokerage fees, especially if they hold trades for longer than a day.
Investors are more concerned about margin loan interest, which can accumulate and reduce investment returns.
8. Asset Types
Traders are more likely to work with highly volatile instruments: cryptocurrency, CFDs, indices.
Investors use more stable assets such as stocks, bonds, ETFs, dividend funds or less volatile cryptocurrencies.
9. Use of short positions
Traders actively use short positions (shorts), capitalizing on a drop in the price of an asset.
Investors mainly work with long positions (long), focusing on the growth of the asset in the future.
Leveraged Trading - Basic Strategies
There are no special trading strategies for leveraged trading, all the same basic strategies are suitable:
Scalping - quick trades, with the aim of taking small movements and fixing profits on them.
Day trading - opening and closing trades during the day, without carrying and holding positions for a long time.
Swing trading - opening a trade within a specific price trend and holding the position to the target for a few days/weeks or longer.
Hedging - opening opposite positions to minimize risks.
Example of leveraged trading
A trader has $100 in his account and he entered a trade (long) with a leverage of 1:6. This means that he opened a trade for $600. If the price of the asset grows by 5%, the profit will be $30. At the same time, if the price falls by 5%, the loss will also be $30.
Using leverage in trading - when it is better to do it
1. When there is a clear trading plan and strategy
Using leverage without a clear strategy is a sure way to lose capital. You should use leverage only if you have a clear trading plan, including:
Entry and exit points.
Set stop losses and take profits.
Risk management (e.g., risk per trade no more than 1-2% of your deposit).
Understanding the volatility of the asset.
Example:
You are trading on the strategy “Reversal from support level” and you are confident in a high probability of price rebound. In this case, leverage can be used reasonably to increase profits.
2. When the market has sufficient liquidity
High liquidity means that there are enough buyers and sellers in the market, which means that spreads (the difference between the buy and sell price) are minimal. This reduces the risk of slippage and makes it easier to execute stop losses.
Best markets for leveraged trading:
Stock market blue chips (Apple, Tesla, Microsoft, Gazprom, Lukoil, Sberbank).
Index futures (S&P 500, NASDAQ, DAX, MOEX).
Cryptocurrency market (BTC, ETH and other altcoins).
Dangerous markets for leveraged trading:
Illiquid stocks and bonds.
Cryptocurrencies with low capitalization.
Example:
It is safer to trade with leverage on EUR/USD than on a little-known cryptocurrency, where sharp price spikes are possible.
3. When high volatility is expected, but with predictable movement
Leverage is beneficial to use during periods of high volatility if you are sure of the direction of movement. For example, before important news or after the release of economic data.
Examples of events with high predictability:
U.S. Federal Reserve meetings (a rate decision can move the dollar in a predictable way).
Publication of quarterly company reports.
Macroeconomic data (unemployment rate, GDP, inflation).
Examples of dangerous events:
Geopolitical crises.
Unpredictable statements by central bank governors.
Sudden disasters and force majeure.
Example:
If the Fed signals an impending interest rate hike, it is highly likely to strengthen the dollar and one can use leverage to trade currency pairs with USD.
4. When conservative leverage is used
The optimal amount of leverage depends on the experience of the trader and the type of asset.
Recommended values:
Stock market: 1:2 to 1:5.
Cryptocurrencies: 1:2 - 1:5 (due to high volatility).
Futures and commodities: 1:5 - 1:20 (depends on volatility).
Example:
It is better for a beginner to trade with no leverage or a maximum leverage of 1:5, while an experienced trader can increase it up to 1:20.
5. When there is competent risk management
The use of leverage requires unconditional adherence to risk management. If you are willing to follow the rules of money management, the use of leverage can be justified.
The basic principles are:
Risk per trade no more than 1-2% of the deposit.
Use of stop losses and take profits.
Do not use leverage in the absence of a clear signal for entry.
Avoid trading on an emotional background.
Example:
If you have a deposit of $1,000 and you use a risk of 1% per trade, the maximum allowable loss = $10. If a 1:10 leveraged asset moves against you by 1%, your stop loss will protect your capital from a large loss.
When it is best NOT to use leverage:
1. When you are inexperienced
Beginners often make mistakes, overestimate their knowledge and use excessive leverage, leading to rapid capital loss.
Example:
If you have no experience and open a trade with 1:100 leverage, even a 1% price movement against you can lead to account liquidation.
2. When the market is unstable and difficult to predict
If the market is chaotic and price movements are unpredictable, it is better not to use leverage or reduce it to a minimum.
Examples of unstable markets:
The height of financial crises.
Sudden political events (wars, sanctions, revolutions).
Panic selling in the stock market.
Example:
During the stock market crash in 2020, many leveraged traders lost their deposits due to a sharp drop in stock prices.
3. When you are not prepared for a possible Margin Call (Margin Call)
If a broker sends a margin call, it means that your balance is insufficient to maintain an open position and the broker may automatically close the trades at a loss.
Example:
You are leveraged 1:50, but the price drops sharply by 2%, the broker closes your trade and you lose most of your deposit.
4. When exposed to constant emotions in trading
Using leverage without discipline leads to capital destruction. Trading requires cold calculation, not greed or fear.
Example:
After a bad trade, a trader decides to “get even”, doubles the position size with high leverage and loses even more.
Conclusion
Leverage is a unique tool in trading, it gives more opportunities for earnings to experienced traders and does not give the right to make gross mistakes by beginners. Therefore, for its successful use, it is important for everyone to understand the risks, adopt the right trading strategies and manage capital competently.
Frequently asked questions
1. Can I use leverage without experience?
It is recommended that beginners start with minimum leverage and learn on demo accounts.
2. What is the best leverage to use?
The optimal value depends on the trader's experience, but for beginners it is recommended not to exceed 1:5.
3. What to do if a margin call occurs?
Refill the account or close losing positions to avoid forced liquidation.
4. What assets can be traded with leverage?
Currencies, stocks, cryptocurrencies, commodities and indices.
5. Which platforms provide leverage?
Most online brokers and exchanges provide leverage, but terms and limits depend on regulation and account type
