Leverage Trading Guide: From Borrowing Money to Amplify Gains to Liquidation Risks - A Complete Analysis

What is Investment Leverage? Understand the Leverage Principle with a Single Chart

Investment leverage, simply put, is borrowing money to trade. You have 1,000 yuan of principal, and through leverage, you can control 10 times the funds to make trades, meaning using 1,000 yuan to operate a 10,000 yuan position. Essentially, this is a risk and reward trade-off—profits are amplified when you gain, and losses are amplified when you lose.

Archimedes once said, “Give me a place to stand, and I will move the Earth,” and the power of leverage indeed is that great. However, while the Earth won’t fall, your account could shrink overnight.

In financial markets, leverage trading is usually achieved through margin. You first put up a portion of funds as margin (proof of funds), and the broker or platform grants you additional credit, which is called leverage multiple. For example, putting up 10% margin gives you 10x leverage; 5% margin equals 20x leverage.

The Two Sides of Investment Leverage: Amplifier and Time Bomb

The Sweetness of Leverage

• Significantly improves capital utilization — Small amounts of funds can participate in large positions without waiting to accumulate full principal
• Profit potential doubles — With the same market fluctuation, your gains can multiply several times. For example, a 5% market increase earns 5% without leverage, but with 20x leverage, you earn 100%

The Bitter Side of Leverage

• Risk of liquidation multiplies — Slight unfavorable market movements can instantly wipe out your margin, leading to a zero account balance
• Losses are magnified — A 5% market drop could mean a 50% loss in your account, not including overnight interest and platform fees
• Psychological pressure is intense — Constantly monitoring positions, fearing margin calls and liquidation

The most terrifying scenario is called “liquidation” or “forced close.” When your losses approach the margin limit, the system automatically sells all your positions to cut losses, leaving you with no chance to breathe.

Common Leverage Trading Tools

1. Futures Trading

Futures are contracts to buy or sell an asset at a predetermined price at a future date. Traders often use futures to hedge risks or speculate. Futures include:

• Metal futures (gold, silver, copper, etc.)
• Agricultural futures (wheat, soybeans, cotton, etc.)
• Energy futures (crude oil, natural gas, etc.)
• Index futures (S&P 500, Dow Jones, etc.)

Advantages of futures are relatively low trading costs, but they require strong market judgment.

2. Options Trading

Options give you a “choice” — the right, but not the obligation, to buy or sell an asset at a specified price on a certain date. It sounds simple, but actual operations involve strike prices, time decay, volatility, and other complex factors, making it more difficult than futures.

3. Leveraged Exchange-Traded Funds (ETFs)

Market-available “2x leveraged ETFs” or “inverse 1x ETFs” belong to this category. They are suitable for short-term trading, but have a fatal flaw — trading costs are 10 to 15 times higher than futures, and holding them long-term can be dragged down by costs.

4. Contracts for Difference (CFD)

CFD is currently the most popular leverage tool on overseas platforms. You don’t need to hold the actual asset, just pay margin to trade both ways (long or short). You can trade everything from precious metals to cryptocurrencies. But CFDs have overnight interest, and the higher the leverage, the higher the fees.

Leverage Traps in the Cryptocurrency Market

In the crypto world, leverage trading is very common due to high volatility, 24-hour trading, and low barriers. But this also means a higher risk of liquidation.

For example:

• You use 1,000 USDT as principal with 20x leverage
• Margin required is only 50 USDT, allowing you to control 1,000 USDT worth of BTC
• If BTC rises 5%, your account profit is 100% (from 1,000 to 2,000)
• But if BTC drops 5%, your account is immediately liquidated (the 50 USDT margin is gone)

This is why the crypto space often features stories of “getting rich overnight and going bankrupt just as fast.”

Core Recommendations for Using Investment Leverage

1. Start practicing with low leverage — Beginners are advised to start with 2x or 3x, not 20x right away
2. Always set stop-losses — This is a lifesaver; without stop-loss, you’re gambling
3. Avoid high leverage on highly volatile products — Cryptocurrencies are already volatile; adding high leverage is suicidal
4. Keep sufficient margin buffer — The higher the margin ratio, the lower the leverage multiple, and the safer your account
5. Understand overnight interest and fee structures — Hidden costs can quietly eat into your profits

Conclusion: Leverage is a Tool, Not a Casino

Leverage itself has no absolute good or bad. The key is how you use it. If you treat leverage as a gambling tool, greedily increasing multiples, you will eventually get liquidated. But if you use it to improve capital efficiency, control risks reasonably, and set proper stop-losses, leverage can indeed accelerate your wealth growth.

The golden rule of investment leverage: always remember, both your gains and losses are multiplied, and risk and opportunity are always twin brothers. Before trading with leverage, ask yourself if you can bear the consequences of your account being wiped out. If not, reduce the leverage multiple or simply avoid it.