Leverage is a magnifying glass
Lesson 5 of 16 in the course “Futures from Zero”. Free, with animations and a quiz.
A magnifier for profit and loss
Leverage is a magnifying glass. With no leverage, the price moves 1% and your margin moves 1%. With ×10 the same move shifts your margin by 10%. The glass enlarges everything equally: profit and loss. That’s where the “+500%” screenshots come from. You don’t see the “−100%” ones next to them that nobody posts.
The bigger the leverage, the shorter the road
See how far the price has to move against you to burn the deposit. With ×2, about 50%. With ×10, about 10%. With ×100, about 1%, and bitcoin moves 1% in a couple of minutes on a normal day. High leverage doesn’t mean “I’ll earn more”, it means “less room for error”. Beginners are fine with ×2 to ×5.
Leverage isn’t the gas pedal, it’s the deposit
Here’s a secret pros know. Two things decide how much you lose: position size and distance to the stop-loss. A $1,000 position with a 2% stop is $20 of risk, whether at ×5 or ×20. Leverage only changes how much deposit you hand the exchange and how close liquidation is. So pros size the position from risk first and pick leverage so liquidation sits far beyond the stop.
Why leverage is lower in Europe
In 2018 the European regulator ESMA looked at retail traders’ accounts at brokers and found that 74% to 89% lose money. After that, the EU set caps for retail: 1:30 on major currencies, 1:20 on gold, 1:10 on oil and other commodities, 1:2 on crypto. The UK has similar rules. Crypto exchanges outside the EU offer ×100 and more, but that doesn’t make it safer. It means you’re the one who has to put the brakes on.
Check yourself
- Margin $100, leverage ×10, price moves 2% your way. What happens to the margin?
Correct answer: +$20, i.e. +20%. The position is $1,000, 2% of it is $20. That’s 20% of the margin. The magnifier works both ways. - Two $1,000 trades with a 2% stop: one at ×5, one at ×20. Where is the risk bigger if the stop hits?
Correct answer: The same, about $20. The loss at the stop = position × distance to the stop. Leverage affects the deposit and liquidation, not this maths. - Why did ESMA cap leverage for retail traders?
Correct answer: Most retail accounts were losing money. The review showed 74–89% of retail CFD accounts in the red. Lower leverage leaves more room for error.