The truth about high-leverage trading: Amplify gains or amplify losses?

Leverage is like a double-edged sword and plays a crucial role in financial markets. Many investors have experienced leveraged trading, whether through margin trading or futures contracts, hoping to make a small investment for a big gain. But reality is often harsh — when the market moves in the expected direction, leverage can indeed amplify profits; conversely, if the judgment is wrong, not only can gains disappear, but the principal may also be lost entirely.

This article will delve into the operating mechanisms, potential risks, and how to properly apply this tool in practice.

What is leveraged trading? Starting from the principles

The essence of leveraged trading is “borrowing money to invest.” By borrowing funds from brokers or platforms, investors can use a smaller margin to control a larger trading volume, achieving the goal of “small investment for big returns.”

For example, suppose you have 100,000 yuan of your own funds and borrow 900,000 yuan from a broker. The total investment amount would be 1 million yuan, which is a 10x leverage.

Common leverage tools include:

• Margin buying stocks: Borrowing money from brokers to buy more stocks
• Derivative trading: Futures, options, contracts for difference (CFDs), which inherently have leverage characteristics

It is worth noting that many companies also achieve leverage through debt financing; for example, mortgage loans for personal home purchases are a form of leverage. The author of the bestseller Rich Dad Poor Dad, Robert Kiyosaki, pointed out that if used properly, mortgage loans for wealth management can generate rental income and become assets rather than liabilities. The key lies in how to convert borrowed funds into stable cash flow.

Leverage and margin: two concepts often confused

Leverage and margin are often mixed up, but they are fundamentally different:

Leverage refers to the scale of debt undertaken, while margin is the collateral funds that investors must deposit to hold a position.

Taking Taiwan index futures as an example, suppose the recent closing price is 13,000 points, with each point worth 200 yuan. The total value of one contract is:

13,000 points × 200 yuan/point = 2,600,000 yuan

In futures trading, you do not need to pay the full 26 million yuan; only a margin (say, 136,000 yuan) is required as collateral. The leverage ratio is calculated as:

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

This means controlling assets worth 2.6 million yuan with 136,000 yuan of capital.

The dual effects of high leverage

Understanding the power of leverage hinges on how its gains and risks are amplified:

Scenario 1: Taiwan index rises 5%

• Gain calculation: (13,650 - 13,000) × 200 yuan/point = 130,000 yuan
• Result: With 136,000 yuan, earning 130,000 yuan profit yields a return of nearly 96%

Scenario 2: Taiwan index falls 5%

• Loss calculation: (13,000 - 12,350) × 200 yuan/point = 130,000 yuan
• Result: Almost all principal is lost, approaching total wipeout

This comparison clearly shows: the higher the leverage, the greater the potential gains and risks.

Investors are advised to increase the margin appropriately in actual operations to reduce leverage and control trading risks. It is also essential to set clear stop-loss points to strictly limit individual losses.

Advantages of leveraged investing

• Enhances capital efficiency: Small investors can use limited funds to engage in larger trades, significantly reducing transaction costs
• Magnifies profit potential: With $100, you can trade products worth $1,000 or even $10,000, with profits also multiplying

Risks of leveraged investing

• High risk of liquidation: The higher the leverage, the higher the probability of margin calls during market volatility. If investors cannot promptly replenish the margin, brokers will forcibly close positions, resulting in not only losing all principal but also facing additional loss recovery obligations
• Losses are magnified: When trades go against you, leverage causes losses to be far greater than expected, and account losses can multiply

Real cases of high leverage liquidation

In 2022, South Korean crypto trader Satto live-streamed Bitcoin futures trading. He opened a 25x leveraged long position when Bitcoin was at $41,666, betting on BTC rising. However, the market reversed; Bitcoin dropped below $40,000. Satto did not stop-loss but added to his leveraged position, ultimately getting liquidated within hours with losses exceeding $10 million.

This case reminds all traders: regardless of the product, abusing high leverage beyond one’s control, combined with immature trading strategies, is a fatal mistake. Investors must be fully prepared for market volatility and avoid the trap of overconfidence and excessive leverage.

Overview of leveraged trading tools

Futures

Futures are standardized contracts traded on futures exchanges, where both parties agree to buy or sell at a predetermined price at a specific future date. The trading instruments include:

• Metals: Gold, silver, aluminum, etc.
• Indices: Dow Jones Industrial, S&P 500, NASDAQ, Hang Seng Index, etc.
• Agricultural products: Wheat, soybeans, cotton, etc.
• Energy: Crude oil, natural gas, coal, etc.

Futures contracts specify the underlying asset, price, and expiration date. Traders can close or roll over positions before expiration. Settlement is based on the “settlement price” in the spot market, which can be unpredictable if the spot market experiences extreme volatility.

Options

Options give the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price within a certain period. Compared to futures, options offer more flexible risk management.

Leveraged Exchange-Traded Funds (ETFs)

In the ETF market, common products include “leveraged ETFs,” “double leveraged positive ETFs,” and “inverse ETFs.” These are suitable for active investors, as they amplify performance during clear trends but perform poorly during sideways or choppy markets, often favoring short-term strategies.

Note that leveraged ETFs usually have higher trading costs, often 10 to 15 times those of futures trading. Investors should weigh convenience against costs.

Contracts for Difference (CFD)

CFDs are a common trading mode on overseas broker platforms. They allow traders to conduct two-way trading (long or short) conveniently without holding the actual assets or engaging in complex financing procedures, and unlike futures, they do not have settlement dates or rollover issues.

CFDs are not standardized contracts; trading conditions vary across platforms, and products are diverse. Using margin, traders can access a wide range of assets globally — stocks, precious metals, commodities, indices, forex, cryptocurrencies, etc. For example, Amazon stock at $113.19, with 20x leverage, requires only $5.66 to trade one share.

Key rules for high leverage trading

Regardless of the leverage tool chosen, investors must remember:

• Start with low leverage: Do not recklessly use high leverage initially; gradually accumulate experience within manageable risk levels
• Set stop-loss points: This is the last line of risk control; plan it in advance
• Control position size: Especially important when using leverage on highly volatile products to avoid excessive risk per trade

Conclusion

Leverage itself is not a beast to be feared; moderate use can indeed enhance investment returns. The key is how to properly utilize borrowed funds, transforming them into steadily growing wealth rather than turning into a tool for speculation.

Once leverage trading is initiated, both risks and rewards are magnified. Particularly in highly volatile products, leverage can lead to rapid liquidation. Therefore, start with low leverage for practice, and always remember the importance of setting stop-loss points.

Leverage is a double-edged sword, but if used with proper risk control, it can become a powerful tool to increase returns. Investors should thoroughly understand its principles and risks, and apply it cautiously and rationally.