What is leveraged trading? The pitfalls behind amplifying gains

What does leverage trading mean? In simple terms, it is investing with “borrowed money.” You only need to put up a portion of the margin to control an asset size far exceeding your own capital. This concept originates from Archimedes’ leverage principle—give me a fulcrum, and I can move the Earth. In financial markets, the power of leverage is indeed astonishing.

For example, if you have 100,000 yuan and borrow 900,000 yuan from a broker, totaling an investment of 1 million yuan, that is 10x leverage. Using less principal to control a larger trading amount aims to “make a small investment for a big gain.”

Leverage and Margin: Two Concepts Not to Be Confused

Many people often confuse leverage and margin; in fact, they are fundamentally different: Leverage involves taking on debt, while margin is the collateral required to hold a position.

Using Taiwan index futures as an example makes the leverage principle clearer:

Suppose the recent closing price of Taiwan index futures is 13,000 points, with each point worth 200 yuan. Then the total value of one futures contract is:

• 13,000 points × 200 yuan/point = 2.6 million yuan

In futures trading, you don’t need to pay the full 2.6 million yuan; only a margin of 136,000 yuan is required to control this contract. The leverage multiple is calculated as:

• 2,600,000 yuan ÷ 136,000 yuan ≈ 19.11 times

In other words, controlling assets worth 2.6 million yuan with 136,000 yuan.

How to Calculate Leverage Returns? Let’s look at these two scenarios

Scenario 1: Taiwan index rises 5%

• Profit = ((13,650 - 13,000) × 200 yuan/point = 130,000 yuan
• With 136,000 yuan principal, earning 130,000 yuan, the return is close to 96%

Scenario 2: Taiwan index falls 5%

• Loss = (13,000 - 12,350) × 200 yuan/point = 130,000 yuan
• The result is almost wiping out the principal, nearly losing everything

From these two extremes, it’s clear: the higher the leverage, the more amplified the potential gains and risks.

The Double-Edged Sword of Leveraged Investment: Advantages and Disadvantages

Advantages:

1. Increase capital efficiency — Small investors can make large investments with less capital, significantly saving on transaction costs
2. Boost profit potential — Trading products worth 1,000 or even 10,000 USD with 100 USD can multiply profits

Disadvantages:

1. High risk of liquidation — The larger the leverage, the bigger the position, and the higher the chance of liquidation
2. Magnified losses — Loss rates increase exponentially, leading to greater account depletion

The Deadly Risk of Leverage Trading: Liquidation

The biggest fear in leverage trading is “liquidation” (also called “margin call”). During market volatility, if investors cannot quickly add funds, brokers will forcibly close positions to prevent losses from exceeding their own risk.

Real case example:

Korean YouTuber Satto live-streamed in 2022, going long on Bitcoin with 25x leverage. He opened a position when BTC was at 41,666 USD, betting on a rise. When Bitcoin dropped below 40,000 USD, he added more leverage long positions, but ultimately got liquidated, losing over 10 million USD in just a few hours.

This story teaches us: abusing uncontrolled leverage combined with immature trading strategies can be fatal.

Common Leverage Investment Tools

) 1. Futures Parties agree to buy or sell at a predetermined price at a specific future time. The trading underlying assets include:

• Metals (gold, silver, aluminum)
• Indices (Dow Jones, S&P 500, Hang Seng)
• Agricultural products (wheat, soybeans, cotton)
• Energy (oil, natural gas, coal)

Futures contracts can be closed or rolled over before expiration. Note that settlement occurs at the “settlement price” of the spot market, and sharp fluctuations may lead to unpredictable settlement risks.

( 2. Options Options give the holder the right (but not obligation) to buy or sell an asset at a specific price at a future date. Compared to futures’ mandatory settlement, options offer more flexible risk management.

) 3. Leveraged ETFs Common in the ETF market are “2x leveraged ETFs” and “inverse 1x ETFs.” These products are suitable for aggressive investors, showing amplified performance in clear trends.

Note that:

• Returns decrease during sideways or choppy markets
• Trading costs are relatively high (usually 10-15 times that of futures)
• Suitable for short-term strategies

4. CFDs (Contracts for Difference)

CFDs allow traders to buy or sell various assets in both directions (long or short) without owning the actual asset. Unlike futures, CFDs have no settlement date, so rollover is not needed.

Advantages of CFDs include:

• Not standardized contracts; trading conditions are flexible across platforms
• Can trade a wide range of global assets (stocks, precious metals, commodities, indices, forex, cryptocurrencies, etc.)
• Use of margin lowers entry barriers

For example, when Amazon stock is priced at 113.19 USD, using 20x leverage requires only 5.66 USD to trade one share.

Practical Tips for Safe Leverage Use

1. Start with low leverage — Don’t begin with high leverage; practice with 1-5x first
2. Always set stop-loss orders — This is the most important risk control measure, set in advance
3. Increase margin — Deposit as much margin as possible to reduce leverage, lowering liquidation risk
4. Prepare sufficient funds — Be ready for market volatility to avoid forced liquidation
5. Avoid overconfidence — Don’t believe in “win big and don’t need to add funds if liquidated”; markets are ruthless

Conclusion: Leverage is not evil; the key is how to use it

Robert Kiyosaki, author of Rich Dad Poor Dad, once said that borrowing is not necessarily a liability. If you master how to use leverage wisely, increasing cash flow, leverage becomes a tool for wealth growth.

Leverage itself is innocent; the problem lies in the user’s mindset and execution. Once leverage is used, both risks and returns multiply. If risk is controlled and used appropriately, leverage can effectively enhance returns. Conversely, reckless leverage use leads to rapid losses.

Final reminder: Regardless of which leverage trading tool you choose, always remember three points—start with low leverage, set stop-loss, and prepare sufficient funds. These are the basic rules for survival in leverage trading.