Leverage Complete Guide: Everything Beginners to Experts Need to Know

Leverage Trading, Is It Really Necessary?

Many traders have this question. If you can make significant profits with a small capital, why doesn’t everyone use leverage? The answer is simple. Leverage is a double-edged sword—it can maximize profits but also amplify losses.

What Exactly Is Leverage?

Just like the principle of the ‘lever’ in physics, in trading, leverage is the concept of moving a large position with a small amount of force(capital). It involves borrowing money from a broker to trade on a larger scale.

Specifically, if you use 10x leverage with 1 million won of capital, you can open a position worth 10 million won. In this case, the exchange takes 1 million won as collateral(margin) and loans the remaining 9 million won.

How Much Does the Amplification Effect of Leverage Matter?

It’s clearer when expressed numerically.

With 1 million won capital, trading without leverage:

• 1% price increase → 10,000 won profit
• 1% price decrease → 10,000 won loss

Applying 10x leverage under the same conditions:

• 1% price increase → 100,000 won profit
• 1% price decrease → 100,000 won loss

In an extreme example, trading 20x leverage on 20 million won, a 5% price increase earns you your entire capital of 1 million won. Conversely, a 5% drop results in losing all your capital. This is the real nature of leverage.

Why Are Margin and Margin Calls Important?

Margin is the collateral you deposit to maintain a position. From the exchange’s perspective, it confirms that the trader can handle potential losses.

An important concept here is the ‘margin call.’ If losses threaten the margin, the exchange demands additional funds. If you fail to respond, your position is forcibly liquidated.

You also need to understand the leverage ratio. A ratio of 10:1 means you can trade 10 times your 1 million won for every 10,000 won. Higher ratios allow larger trades with less capital but also increase risk. For example, at 50:1 leverage, a 1% price drop results in a 50% loss.

Leverage vs. Non-Leverage, What’s the Difference?

The biggest advantage of leverage trading is the speed of profit generation. Small price movements can yield meaningful gains, and multiple positions can be opened simultaneously with limited capital, making portfolio diversification easier. It also allows access to high-value assets and can be used for hedging risks.

However, there are clear disadvantages: amplified losses, margin call risks, and high psychological stress. Additional costs like interest and swap fees also accumulate.

Non-leverage trading is the opposite. It offers stability and easier risk management but limits potential profits with the same capital. It is especially safer for beginners in volatile markets.

How Do I Decide if Leverage Is Right for Me?

Answer these questions honestly:

1. Are you prepared to handle losses exceeding your capital? (Psychological, Financial)
2. Do you have sufficient market analysis skills and trading experience?
3. Can you stay emotionally stable even if significant losses occur?
4. Is the liquidity of the market you’re trading in sufficient?

If you can’t answer ‘yes’ to all, leverage should be used cautiously. Especially if you’re inexperienced or can’t handle the stress of large losses, it’s recommended to start with non-leverage to build a foundation.

How to Manage Risks in Leverage Trading?

Even with leverage, proper management rules can control risks.

Stop-loss orders are essential. Set exit points before opening a position. Using automatic stop-loss orders helps avoid emotional decisions.

Set reasonable position sizes. Ensure that a single loss doesn’t jeopardize your entire portfolio by maintaining appropriate scales relative to your capital.

Diversify your portfolio. Investing across multiple assets and markets reduces the impact of volatility in any single market.

Continuously monitor the market. Regularly check market trends, volatility, and potential risks, and adjust your positions accordingly.

Use trailing stops. When profits start to accumulate, set trailing stops to prevent larger losses and protect gains from sudden reversals.

Avoid excessive leverage. Using high leverage ratios like 50x or 100x in volatile markets is destructive. Limiting leverage to below 10x is wiser.

Keep a trading journal. Record why you entered a position, why you closed it, the results, and lessons learned. This helps improve your trading skills over time.

Major Instruments Where Leverage Is Used

Forex Market: Due to small exchange rate fluctuations, many traders use high leverage of 100:1 or more. Liquidity is also abundant.

CFD (Contracts for Difference): Profiting from price movements without owning the underlying asset. Combining with leverage allows opening large positions with small capital, ideal for short-term trading.

Futures: Contracts to buy or sell an asset at a predetermined price in the future. Leverage makes even small price changes profitable.

Options: Trading the right to buy or sell at a set price. Leverage enables large-scale trades with minimal capital.

Finally

Leverage trading is undeniably attractive because it allows quick profits. However, it also carries the risk of equally rapid losses.

The key to successful leverage trading is controlling greed. Prioritize ‘survival’ over maximum profit. Follow risk management rules, choose leverage appropriate to your experience level, and you can become a smarter trader.

There’s no need to jump in with high leverage from the start. Begin with lower ratios, gain experience, and wait until your psychological resilience and market sense mature. That’s the long-term way to survive in trading.