How leverage cuts both ways
Lesson 13 · about 8 min
Leverage is borrowing to hold a position larger than your money. It is not evil and it is not a shortcut; it is a multiplier applied to whatever happens, and it does not know or care which direction that is.
The one-line definition
leverage = notional position value ÷ equity used
If you have $1,000 and hold a $10,000 position, you are at 10×. Every 1% move in the position is a 10% move in your $1,000.
| Price move | 1× | 5× | 10× | 20× | 50× |
|---|---|---|---|---|---|
| +1% | +1% | +5% | +10% | +20% | +50% |
| −1% | −1% | −5% | −10% | −20% | −50% |
| −2% | −2% | −10% | −20% | −40% | −100% |
| −5% | −5% | −25% | −50% | −100% | wiped |
| −10% | −10% | −50% | −100% | wiped | wiped |
The table is symmetric until it isn't. A +2% move at 50× is +100%; a −2% move at 50× is the entire account. There is no next trade after the second one.
Key idea: Leverage multiplies your return on equity by the same factor in both directions, and losses beyond 100% simply end the account.
Offered leverage versus used leverage
Brokers advertise leverage: 4:1 for stocks intraday, 30:1 or 50:1 for forex, 100× or more on crypto perpetuals. That number is the maximum you are permitted to use. It has nothing to do with how much you should use.
The leverage you actually use is set by your position size, which (from Module 2) is set by your stop. Take the EUR/USD example from Module 2: a $5,000 account, 16 micro lots, notional $17,360. Used leverage = 17,360 ÷ 5,000 = 3.5×. The broker may have offered 30×; the risk plan used 3.5×. If the broker doubled the offered leverage tomorrow, the correct position would not change by a single micro lot.
This is the crucial reframe: under a fixed-fractional plan, leverage is a consequence of sizing, not an input to it. The moment you start from "how much leverage should I use?" you have thrown away the stop.
What leverage does change
Two things, both real:
- Capital efficiency. A $17,360 forex position with 3.5× leverage needs only about $580 of margin at 30:1, leaving the rest of the $5,000 free for other positions. Useful, and also the mechanism by which people end up with five correlated positions (Module 5).
- The distance to forced exit. At high leverage, the broker or exchange closes your position long before it reaches zero, at a price determined by their margin rules rather than your stop. The next lesson covers exactly where.
What leverage does not change: the dollars you lose when your stop is hit. 0.25 ETH with a $160 stop distance loses $40 at 1×, 10× or 50×. Leverage only decides whether you get to that stop or get liquidated first.
The asymmetry beginners miss
Look at the table's −5% row at 10×: −50%. Now use the recovery table from Module 1. A 50% loss needs a 100% gain to recover. To make 100% at 10× you need a +10% move in your favour, with no −5% move against you along the way. Leverage does not just multiply the loss, it multiplies the size of the move you need to undo it.
Worked example. $1,000 account, 10× long, $10,000 position.
- Price falls 5%: position now $9,500. Equity = 9,500 − 9,000 borrowed = $500. Down 50%.
- To return to $1,000 equity, the position must be worth $10,000 again, a rise of 500 ÷ 9,500 = 5.26%.
- But at this point the broker sees $500 equity on a $9,500 position, 19×, and a further 5.26% drop would take equity to zero. Most will close you out well before that.
Nothing about the trade idea changed. The leverage converted a routine 5% dip into a coin flip on survival.
A useful mental habit
Before any leveraged trade, write down two numbers:
- Move to stop: the percentage move that hits your stop. Say 2%.
- Loss at stop as % of account: used leverage × move to stop. At 3.5× that is 7%... which is far too much. At 0.5× it is 1%.
If the second number is bigger than your risk per trade, the position is too big regardless of what the leverage dial says.
Try it: For your last three trades, compute the notional value and divide by your account to get used leverage. Then multiply used leverage by the percentage distance to your stop. Compare that with the risk per trade you thought you were taking.
Recap
- Leverage = notional ÷ equity. It multiplies gains and losses equally.
- Offered leverage is a ceiling; used leverage is a consequence of stop-based sizing.
- Leverage changes capital efficiency and the distance to forced exit, not the dollars lost at your stop.
- A leveraged loss needs a proportionally larger move to recover, and you may be closed out before it comes.
- Check: used leverage × % move to stop must equal or be less than your risk per trade.
See it drawn
Original diagrams for the ideas on this page. Illustrative, not real market data.