From leverage risks to maximizing profits: Everything traders must know

Trading using borrowed funds is an attractive method to aim for significant profits with minimal capital. However, many traders overlook the leverage risk. Since profits are amplified by the same ratio as losses, the risk of loss is also magnified. In this article, we will cover everything you need to know for safe and efficient trading, from how leverage works to practical risk management techniques.

The Reality of Leverage Risks You Didn’t Know

Many novice traders simply calculate “10x leverage means 10x profit.” But this is only a small part of what leverage entails.

Let’s assume you have 1 million won in capital and use 20x leverage. In this case, you can open a position worth 20 million won. If the price rises by 5%, you gain a profit of 100% of your capital, i.e., 1 million won. It looks very attractive.

But what happens if the price drops by just 5% in the opposite direction? You will incur a loss of 1 million won, the entire capital. This is the core of leverage risk. The actual price fluctuation might be only 5%, but your account could go to zero.

The bigger problem is that it doesn’t end there. If you fail to meet the margin requirements, the broker will forcibly liquidate your position. This is called a margin call, and at that moment, you are forced to realize your losses.

Understanding the Basic Mechanism of Borrowed Trading

To trade properly using borrowed funds, you must first understand the concepts of margin and leverage.

Margin(refers to the amount deposited as collateral to maintain a position. From the broker’s perspective, it is a device to verify whether the trader can handle potential losses. This requirement varies depending on market volatility, asset type, and position size.

Leverage)ratio indicates the ratio of the actual trading amount to the margin. For example, 10x(10X) leverage means that when you deposit 10,000 won, you borrow 90,000 won to trade a total of 100,000 won. The higher the leverage, the larger the position you can open, but the risk of loss also increases dramatically.

In a no-leverage trade, a 1% decline results in a 1% loss. But with 50x leverage, a 1% decline results in a 50% loss. This is why leverage risk is so formidable.

Borrowed Trading vs. Regular Trading: The Fundamental Difference

( Profit Structure Difference

Investing 1 million won in regular trading and the price rising by 1% yields a profit of 10,000 won. In the same situation with 10x leverage, you borrow an additional 1 million won, investing a total of 10 million won, resulting in a profit of 100,000 won.

On the surface, borrowed trading seems superior. But the loss structure is completely opposite.

) Fundamental Risk Difference

Let’s consider a 10% price drop.

Regular trading: 1 million won investment → 100,000 won loss → 10% loss of capital

10x leverage trading: 10 million won position → 1 million won loss → entire capital loss

The more dangerous aspect is that in regular trading, losses stop there, but in borrowed trading, additional margin calls can occur, leading to further losses.

Efficient Use of Capital

With 1 million won in regular trading, you can open only one position of that size. But with 10x leverage, you can open ten such positions. This allows for diversification, which can help mitigate risk.

However, this advantage only works if risk management is properly implemented.

Is Borrowed Trading Right for You?

Before starting borrowed trading, ask yourself these questions:

First, are you mentally prepared to handle losses larger than your initial investment?

This is not only a financial issue but also a psychological one. You must remain calm when facing a situation where you lose 50% of your capital.

Second, do you fully understand the market and trading mechanisms?

Borrowed trading suits experienced investors. Novices who rush into it are highly likely to incur significant losses.

Third, do you have sufficient assets?

If you hold assets worth at least twice your initial investment, you can operate somewhat comfortably. But if you invest all your assets as capital, you should avoid borrowed trading.

Fourth, is the market sufficiently liquid?

Trading borrowed funds in markets with high volatility and low liquidity can lead to unexpected losses. Markets like forex or major indices with high liquidity are safer.

If you do not meet all four conditions, it is recommended to gain experience through regular trading before attempting borrowed trading.

Clear Advantages and Hidden Disadvantages of Borrowed Trading

Clear Advantages

High profit potential

Even small price movements can generate substantial profits. This is the main reason many traders are attracted.

Maximized capital efficiency

With the same capital, you can diversify into more assets. Theoretically, this allows for more effective portfolio risk management.

Access to high-priced assets

Assets that were previously difficult to afford become tradable.

Ability to execute hedging strategies

You can establish positions needed for risk hedging with less capital.

Overlooked Disadvantages

Maximization of losses

Since profits are amplified 10 times, losses are also 10 times. In the worst case, you could lose more than your initial investment.

Fear of margin calls

If you fail to meet margin requirements, the broker will forcibly close your position regardless of your wishes. This locks in losses and leaves no chance for recovery.

Market volatility risks

Rapid price movements can lead to significant losses. During sharp fluctuations caused by news or events, stop-loss orders may not execute in time.

Accumulating trading costs

Borrowed funds accrue interest. Holding long-term positions can result in interest and swap costs eating into profits.

Psychological burden

Small price changes can significantly affect your account balance, causing emotional instability and increasing the likelihood of impulsive trading decisions.

Practical Risk Management Techniques

Knowing that borrowed trading carries high risks, the key is how to manage them. Strictly following these methods can significantly reduce risks.

Mandatory stop-loss orders

Set a stop-loss level when opening a position to automatically close the trade if the price hits that point. This prevents emotional decisions from enlarging losses.

Careful adjustment of position size

Limit each position considering your capital and leverage. Avoid risking your entire portfolio on a single mistake.

Diversify across multiple assets

Spread investments across various assets and markets to reduce single-market risk.

Continuous monitoring of market conditions

Regularly check current trends, potential risk factors, and technical signals. This allows timely adjustments to your positions.

Use of trailing stops

Implement trailing stops on profitable positions to prevent profits from being wiped out by sudden reversals.

Moderation in leverage use

Avoid excessive leverage, especially in volatile markets. Prudent leverage is key to long-term profits.

Maintain trading records and analyze

Record reasons for entry and exit, results, and lessons learned for each trade. Regular review helps identify weaknesses and improve strategies.

Major Instruments Applying Borrowed Trading Systems

The forex market is the most active area for borrowed trading. Since currency fluctuations are often moderate, high leverage (over 100x) is common among traders seeking high returns.

CFD### contracts allow traders to profit from price movements without owning the underlying assets. When combined with borrowed funds, they enable large trading volumes with small initial capital, making them popular for short-term trading.

Futures contracts are agreements to buy or sell assets at a predetermined price in the future. Using borrowed funds, traders can generate meaningful profits from small price movements.

Options give the right, but not the obligation, to buy or sell an asset at a set price. Using borrowed funds, traders can execute large trades with minimal capital.

Conclusion: Wise Choices Shape the Future

Understanding the leverage risk is the first step toward successful borrowed trading. While high returns are attractive, remember that the risk of loss is equally high.

Evaluate your financial situation, market knowledge, and psychological stability objectively before deciding to engage in borrowed trading. Rushing into it can lead to significant losses.

If you choose to trade with borrowed funds, establish strict risk management rules and never violate them. Setting stop-loss orders, appropriately sizing positions, and diversifying your portfolio are crucial.

For those lacking experience, it is wiser to first gain familiarity through regular trading, then gradually move into borrowed trading after thorough preparation. Systematic preparation is the most reliable way to achieve long-term profits.