Trading with leverage: Opportunities and pitfalls of using leveraged products

What are leveraged products and how do they work in modern trading?

If you’re wondering what leveraged products are, they are based on a fundamental concept of modern financial trading: the ability to profit disproportionately from price movements using borrowed capital. However, this tempting prospect comes with significant risks – up to complete capital loss and, in extreme cases, beyond.

For beginners or savers who want to protect their retirement savings, this strategy is unsuitable. Instead, they should focus on long-term, unleveraged investments. The reality is simple: high returns and massive risks are inherently linked with these instruments. Anyone working with them should be aware that substantial financial losses are possible – and quickly.

The basic principle: borrowed capital as a magnifying glass for gains and losses

The term “leverage” describes in trading the method of using borrowed capital to multiply one’s trading position. Put simply: you borrow money from your broker to trade larger positions than your available equity would allow.

A practical scenario illustrates this: you have 1,000 euros of equity and want to open a position worth 10,000 euros. With a leverage ratio of 1:10, this becomes possible – you invest 1,000 euros, and the broker adds 9,000 euros. If the value increases by 7 percent (to 10,700 euros), not only does the position double, but your equity grows by ten times the price increase: from 1,000 euros to 1,700 euros, a 70 percent profit.

But what happens in the opposite case? If the price drops by 7 percent (to 9,300 euros), your equity doesn’t decrease by 7 percent but by 70 percent – from 1,000 euros to just 300 euros. To offset this loss, you would need over 200 percent return afterward. Plus, there are interest costs for the borrowed capital.

How leverage multiplies market movements

The leverage effect amplifies each price movement by the multiple of the chosen leverage. The higher this is, the more extreme both profit opportunities and loss risks become. A trader with 1,000 euros can, for example, work with different leverage levels:

• Leverage 5:1 allows trading with 5,000 euros
• Leverage 10:1 allows trading with 10,000 euros
• Leverage 20:1 allows trading with 20,000 euros

If the market drops by only 5 percent, the differences are dramatic: at 5:1, you lose 250 euros; at 10:1, 500 euros; at 20:1, your entire equity is wiped out – and you still owe the broker 1,000 euros for interest on 19,000 euros of borrowed capital.

A crucial point often overlooked: leverage itself isn’t the problem – it’s the incorrect sizing of the leverage relative to your capital and risk tolerance.

Which assets can be traded with leverage?

Stocks and related products

Stocks are ownership shares in companies. Those speculating with leverage on stocks have several options:

Stock CFDs enable trading without ownership – you only speculate on the price difference. Stock options give you the right (not the obligation) to buy or sell a stock at a certain price until an expiration date. Leveraged stock ETFs like SOXL (triple leverage on the SMH) offer direct leverage exposure. Finally, you can trade stocks on margin – the broker lends you capital and automatically sells the position if the price falls too much. This scenario is called a “margin call.”

Options and warrants

These derivatives grant the right to trade an asset at a set price until a certain date. The leverage here is particularly evident: you pay only a fraction of the actual asset as collateral. However, the risk is significant – retail investors systematically lose capital in options trading. Options lose value over time due to time decay and decreasing volatility. Professional traders prefer selling options rather than buying them, because the probabilities favor the seller.

Futures and standardized contracts

Futures are contracts to buy or sell an asset at an agreed price on a future date. They offer high leverage because only a fraction of the contract value is required as collateral. Examples: NQ for Nasdaq 100 futures, ES for S&P 500 futures, HG for copper futures.

Trading futures requires technical chart analysis expertise and strict risk control. Beginners should avoid this market.

Certificates and structured products

Certificates are exchange-traded debt securities that mirror the performance of an underlying asset. They can be equipped with leverage – profits and losses of the underlying are then multiplied. There are bonus certificates, barrier certificates, and discount certificates with different payout structures.

Forex

The foreign exchange market is the largest market worldwide. Forex accounts enable trading with extremely high leverage – often 100:1 or more – because only a small part of the trading value needs to be deposited as collateral. Currency pairs can be traded around the clock on global forex exchanges. Forex trading is used for speculation on currency rates, hedging against currency risks, and international money transfers.

( Bonds and fixed-income securities

Bonds are debt securities issued by companies and governments. They are traded on exchanges or OTC )Over-the-Counter###. Characteristics include maturity, interest rate, and credit risk. Bonds offer regular income and enable portfolio diversification. Leveraged bond ETFs exist but are less common than leveraged stock ETFs.

( Exchange Traded Funds and commodity products

ETFs and ETCs track indices or commodities. They allow diversified investments with low fees. Leveraged variants like ETF-CFDs and ETC-CFDs amplify engagement – you trade with less capital and larger positions.

) Cryptocurrencies

Bitcoin, Ethereum, and other digital stores of value are based on blockchain technology. They serve as means of payment, speculation objects, and high-risk investments. Volatility is exceptionally high. A golden rule: only speculate with capital you can afford to lose. This phrase should be read and internalized multiple times.

The advantages of leveraged products – but with caution

Higher profit potential: With a smaller investment, you can benefit from larger price movements – profits exceed the invested capital many times over.

Extended market presence: You trade significantly larger positions than your equity would normally allow and respond more flexibly to market opportunities.

Various strategies: You bet on rising ###Long### or falling (Short) prices. Hedging is possible – for example, through short futures positions against a stock portfolio, where losses in one position are offset by gains in another.

Convenient execution: Trading is done via user-friendly online platforms.

Often lower fees: Compared to other investment forms, leveraged products often have more favorable transaction fees.

The risks – the critical counterbalance

Increased loss risk: The biggest disadvantage is clear: losses can quickly exceed your entire equity. In the worst case, you owe the broker more than your account balance.

Sudden wipeouts: Losses can surpass the initial investment many times over – especially with high leverage.

Amplified volatility: Leverage not only multiplies gains but also market fluctuations. Small movements have a dramatic impact. Excessive leverage can lead to massive long-term losses, as almost every trading method involves losing trades as well.

High complexity: Leveraged products are complex financial instruments. Without a precise understanding of how they work, you expose yourself to significant risks of unexpected losses. Recommendation: first test your leverage strategies with paper trading – a tool offered by most brokers that works with fictitious accounts and causes no real losses.

The mathematics of stop-loss and risk management

Every trade is based on a hypothesis – usually a combination of technical analysis and fundamental considerations. A trade consists of two critical elements: a stop-loss level and a profit target.

Choose the stop-loss too tight, and it will likely be triggered even if the price would have reached the target afterward. Set it too loose, and the trade may no longer be profitable – the probability of a stop-loss multiplied by the potential loss should be less than the probability of a profit multiplied by the profit target.

A critical point: the stop-loss loss must not significantly jeopardize your trading capital and related goals. You need to be able to continue trading after a stop-loss. If your trading system works statistically, over the long term, profits will not only offset losses but generate positive performance.

A common mistake is an excessively large leverage. If set too high, your account will not recover or will do so only very slowly after a few stop-loss trades.

Final thoughts: leverage as part of the overall system

Leveraged products can increase your return opportunities but only with great caution. They should only be used by experienced traders with clear risk appetite and market knowledge. Never trade with more capital than you can afford to lose.

Thoroughly inform yourself about how they work and their risks. Choose a leverage that fits your risk tolerance and trading strategy. Pay particular attention to your stop-loss in trading – it is non-negotiable.

Traders of all levels – beginners, advanced, experts – should continuously develop through training courses. The goal should be: no capital loss and steady, if not exorbitant, profits. Leverage is only one element of the trading system. If used, it must be employed carefully.

The journey to successful trading begins with discipline, not with high leverage.