Understand the meaning of leveraged investing in one article, revealing why experts all use leverage

What Does Leverage Investing Really Mean?

When mentioning the word “leverage,” many people’s first reaction is risk. But if you ask traders what leverage investing is, the answer is often: “Using 100 dollars to control a 10,000-dollar opportunity.”

The meaning of leverage is actually very simple—borrowing money to trade. You put in 5,000 dollars as margin, and the exchange loans you an additional 5,000 dollars, allowing you to operate a 10,000-dollar position. When making profits, your returns are doubled; when losing money, your losses are also doubled. This is the core logic of leverage investing.

Ancient Greek mathematician Archimedes once said: “Give me a place to stand, and I will move the Earth.” The leverage principle in investment markets is the same as in physics—using a small force, through a tool, to move larger assets. For traders, this “tool” is the margin account and leverage ratio.

Margin and Leverage: Two Concepts That Are Easy to Confuse

Many beginners cannot distinguish between margin and leverage. Simply put:

• Margin: The principal you deposit into your trading account, the “entry fee” for trading
• Leverage: The additional credit extended by the exchange, amplifying your trading size

Their relationship is inverse. The lower the margin requirement, the higher the leverage ratio. For example, a margin requirement of only 10% means 10x leverage; a margin requirement of 50% means 2x leverage.

Real-world example: You have 5,000 dollars and want to trade forex. The exchange says “you can use 5x leverage,” which means you can control a 25,000-dollar position. Suppose the euro appreciates by 10%, then you earn 2,500 dollars (excluding fees). But if the euro depreciates by 10%, you lose 2,500 dollars, leaving your account with 2,500 dollars. At this point, if the liquidation level is 50%, the exchange will forcibly close your position to prevent further losses.

Why Is Leverage Investing So Attractive?

Advantage 1: Trade larger positions with less money

Traditional equal-sized trading allows only 100 dollars to trade 100 dollars worth of products. With leverage, 100 dollars can control 1,000 or even 10,000 dollars worth of products. For retail investors with small capital, this greatly improves capital efficiency.

Advantage 2: Multiplying profits

Leverage acts like a magnifying glass for gains. Small market fluctuations can yield significant returns when using leverage. Many day traders leverage this to quickly profit in highly liquid markets like forex and cryptocurrencies.

Disadvantage 1: Increased risk of liquidation

The higher the leverage, the greater the risk of margin calls. For the same market fluctuation, 10x leverage is more likely to be liquidated than 2x leverage. This is why many beginners lose everything when they first use high leverage.

Disadvantage 2: Losses are amplified proportionally

Profits can be exhilarating, but losses are also multiplied. A market decline of only 5%, when using 10x leverage, could wipe out 50% of your capital. That’s why experienced traders emphasize that stop-loss is even more important than take-profit.

What high-leverage trading tools are available?

1. Forex Trading—The Largest Leverage Market Globally

The forex market has a daily trading volume exceeding $5 trillion, with high liquidity and transparent information. Most importantly, forex markets operate 24/7, especially friendly to Chinese investors. The peak hours are from 8 PM to 12 AM Beijing time, when European and American markets are most active, offering the most opportunities.

Forex CFDs allow for two-way trading—long and short positions. Some platforms offer leverage over 100x, but it’s generally recommended for beginners to keep it within 20x.

2. Cryptocurrencies—The Most Volatile Emerging Assets

Bitcoin, Ethereum, and other cryptocurrencies are highly volatile due to their short existence and the emotional swings of market participants. This volatility presents both opportunities and traps for leverage trading.

Crypto exchanges typically offer leverage ranging from 3x to 100x. There’s a saying in the crypto world: “Three times leverage leads to liquidation, ten times leverage leads to a nightmare,” satirizing the deadly risks of high leverage in extreme market conditions.

3. Stock Indices—Relatively Controlled Risk

Stock indices represent the average performance of a basket of stocks. For example, CSI 300, NASDAQ 100. Investing in indices spreads risk better than investing in single stocks.

Trading indices with leverage has several benefits:

• Avoids black swan events (sudden crashes of individual stocks)
• No worries about suspensions
• Smaller volatility compared to individual stocks, making risk more manageable
• Allows capturing the trend of entire sectors or countries with a single position

4. Commodities—A Hedge Against Inflation

Gold, crude oil, agricultural products, and other commodities are traditional hedging tools. They tend to rise when other assets fall, exhibiting negative correlation, making them good tools for diversification.

Gold and oil have the best liquidity, suitable for leveraged trading. However, political risks and sudden events (like geopolitical incidents) can cause sharp price surges.

How to Avoid Liquidation When Using Leverage?

Step 1: Choose a leverage ratio suitable for yourself

90% of losses for beginners come from “using too high leverage.” The standard advice is:

• Beginners: 2-5x leverage, focus on learning trading logic
• Experienced traders: 5-20x leverage, flexibly adjust based on market volatility
• Only seasoned traders should consider above 20x leverage

Never follow those who recklessly increase leverage just because the margin requirement is low, ending up “liquidated after a single retracement.”

Step 2: Always monitor the liquidation level

Different platforms set different liquidation levels, commonly when account equity drops to 30-50% of margin. When setting leverage, make sure to calculate the liquidation point carefully to ensure enough risk buffer.

Step 3: Strictly adhere to stop-loss discipline

This is the most overlooked yet crucial point. Many traders “hold on” during losses, thinking “it will bounce back,” only to get liquidated. The correct approach is to set a stop-loss before entering a trade, and once triggered, close the position unconditionally. The stop-loss should be within your acceptable loss range (generally no more than 2-3% of your account per trade).

Step 4: Use technical analysis to reduce operational risks

Tools like support/resistance levels and moving averages are not foolproof but can significantly reduce wrong trades. Many professional traders achieve high win rates through rigorous technical analysis and risk management.

Step 5: Maintain a balanced mindset

Markets like forex and cryptocurrencies are highly volatile, easily triggering emotional reactions. Watching profits makes you excited; seeing losses makes you anxious. Emotional trading often leads to chasing highs and selling lows, worsening losses. The best approach is: develop a plan → execute it as planned → don’t change strategies based on short-term fluctuations.

Final Words

Leverage investing, in essence, is magnifying returns in a smart way, within your risk tolerance. It’s not a gambling tool nor a shortcut to overnight riches. Those who truly master leverage are often traders with a clear understanding of risk, strong discipline, and stable mindset.

The meaning of leverage is simple, but mastering it requires time and experience. Instead of blindly chasing high leverage, spend more time honing your trading skills and risk management. That’s the true path to surviving long-term in the market.