Lessons › Risk and money management › Leverage and margin: the double-edged sword

World 5 · Risk and money management · lesson 9 · level 3

Leverage and margin: the double-edged sword

Leverage lets a small deposit control a big position, so small moves become big wins and big losses.

In one line

Leverage lets a small deposit control a big position, so small moves become big wins and big losses.

Explained simply

Imagine a seesaw where a tiny push on one end makes the other end fly up or crash down. Leverage works like that: a small price move becomes a big change in your deposit. It feels great when the move goes your way and terrible when it does not.

The lesson

Margin is the deposit needed to open a leveraged position, and leverage is the position's value divided by that deposit. With 10x leverage a 1% price move changes your deposit by about 10%, and a move of about 10% against you can wipe it out. Before that point the broker or exchange asks for more money, called a margin call, or closes the position itself, called liquidation, often at a bad price. Sizing from your stop keeps the planned loss the same at any leverage, as long as the liquidation price sits beyond the stop.

A worked example

Illustrative example: a trader deposits 1,000 as margin at 10x leverage, so the position is worth 10,000 (1,000 times 10). A 1% rise adds 100 (10,000 times 0.01), which is 10% of the deposit (100 divided by 1,000 times 100). A 10% fall loses 1,000 (10,000 times 0.1), the whole deposit, and at 20x a fall of only 5% (100 divided by 20) would do the same.

The same idea at four levels

1. Beginner. Leverage lets a small deposit control a bigger position, so gains and losses both grow.
2. Foundation. Leverage = position value ÷ margin, so 1,000 of margin at 10x controls a 10,000 position.
3. Intermediate. The move that wipes out the deposit is 100% ÷ leverage: 10% at 10x, 5% at 20x and 1% at 100x.
4. Advanced. Brokers and exchanges close positions before the deposit reaches zero, usually at the market price, which can be poor in fast moves.
5. Expert. Experts size the position from the stop first, so leverage only sets how much margin is tied up, and they keep the liquidation price well beyond the stop.

Mistakes to avoid

• Choosing the leverage first and the position size second.
• Believing a stop always protects you from liquidation in very fast moves.
• Placing the stop beyond the liquidation price, so the position is closed before the stop can act.

Goal of this lesson: Understand how leverage and margin magnify gains and losses, and what liquidation means.