Leverage trading in simple terms: How to use small money to generate big profits?

What does leverage mean? Simply put, leverage is borrowing money to trade. You use 100 dollars as margin, and the trading platform loans you 900 dollars, so you can operate a 1,000-dollar position. If the market rises by 10%, you earn 100 dollars instead of just 1 dollar—that’s the power of leverage.

However, there is no free lunch in the world. While leverage amplifies gains, it also doubles the potential losses. If the market drops by 10%, you could lose all your principal directly. That’s why beginners must understand the dual nature of leverage— it can help you earn over ten thousand a month or wipe you out overnight.

Why is leverage so popular?

Ultimately, it’s because it improves capital efficiency. Small retail investors and those with insufficient funds can participate in large-scale trades previously out of reach through leverage. For example, in the cryptocurrency market, one BTC might cost tens of thousands of dollars, but with 10x leverage, you only need a few thousand dollars to open a position.

At the same time, leveraged trading gives investors the chance to profit from more market fluctuations. Whether prices go up or down, you can make money by going long or short. This opens up new possibilities for traditional stock investors accustomed to unidirectional thinking.

Don’t rush to open leverage, first understand these tools

Futures Trading

Futures are the most traditional leverage tool. You agree with a counterparty to buy or sell a commodity at a fixed price on a future date. Modern financial markets offer a variety of futures products:

• Commodity Futures: Physical commodities like oil, gold, agricultural products
• Index Futures: Instruments tracking market indices, such as Nasdaq 100 futures
• Cryptocurrency Futures: BTC futures, ETH futures, etc.

The advantage of futures is high liquidity; the downside is that they are relatively complex to operate and require continuous monitoring of the market.

Options Trading

Options give you a choice—the right to buy or not buy at a predetermined price in the future. It sounds simple, but in reality, it’s one of the most complex leverage tools. You need to understand concepts like strike price, time decay, and implied volatility to play effectively.

For most retail investors, options have a high entry barrier and are not the first choice.

Leveraged ETF Funds

This is a lazy solution designed for retail investors. Leveraged ETFs already incorporate leverage ratios (such as 2x, 3x), so buying them automatically grants leveraged returns.

But note that leveraged ETFs are suitable for short-term trading and not for long-term holding. The reason is that daily rebalancing of positions incurs additional costs, which can eat into long-term gains. Moreover, during market volatility, leveraged ETFs often underperform the broader market.

Contracts for Difference (CFD)

This is currently the most popular mode on overseas trading platforms. CFDs allow you to trade various underlying assets—stocks, indices, forex, precious metals, cryptocurrencies—without owning the actual assets, using only margin.

The advantage of CFDs is straightforward operation—you don’t need to deal with the complexities of margin financing; the risk is higher, as the system will automatically close your position based on your losses. Once the liquidation level is reached, there’s no room for negotiation.

The dual nature of leveraged investing

The beautiful imagination of returns

With proper leverage, small amounts of money can do big business. If you are bullish on a certain cryptocurrency and expect it to rise by 50% in the future:

• Without leverage: invest 10,000 dollars, earn at most 5,000 dollars
• With 5x leverage: use 10,000 dollars as margin to trade a 50,000-dollar position, earning 25,000 dollars

That’s why many people are addicted to leverage.

The harsh reality of risks

But if you make the wrong judgment, leverage can push you into hell. Using 5x leverage again, if the market drops 20% in the opposite direction, your entire principal can be lost, and you might even owe money to the trading platform.

This is especially true in the cryptocurrency market. Its volatility far exceeds traditional assets; a negative news event can cause a 50% drop within hours. If you are using 20x leverage, you could be forcibly liquidated within minutes.

Don’t ignore hidden costs

Leverage means borrowing money, which incurs interest. Periodically (usually every 8 hours), you need to pay overnight fees. On some platforms, this fee can be as high as 0.1% of your account balance daily, amounting to 36% annually—a significant expense.

To avoid liquidation, these points must be followed

First, strictly implement stop-loss. Whether trading futures or CFDs, set your stop-loss price at the time of opening the position. Many people’s problem is reluctance to cut losses, resulting in small losses turning into big ones. Remember: exit alive to have a chance to turn things around.

Second, start practicing with low leverage. Don’t jump straight into 20x leverage. Begin with 2x or 3x to gain experience and understand market temperament. Once you can consistently profit, consider increasing leverage.

Third, avoid full positions. Always keep some cash as emergency funds. This way, if a black swan event occurs, you can top up your margin and avoid forced liquidation.

Fourth, avoid trading during high volatility periods. Especially in the cryptocurrency market, major news releases can cause sudden spikes in volatility. If you hold high-leverage positions during such times, liquidation becomes very likely.

Summary: Leverage is a tool, not gambling

Leverage itself is neither good nor bad; it depends on how you use it. Properly applying leverage, combined with scientific risk management and sufficient market knowledge, can indeed help grow wealth. But if you treat it as a gambling tool, you will eventually have to pay the price.

Among futures, options, CFDs, and leveraged ETFs, there is no absolute best choice—only the one most suitable for you. Beginners are advised to start with CFDs or leveraged ETFs, as they are more straightforward. After gaining enough experience, explore the deeper strategies of futures or options.

Remember one thing: the biggest enemy of leverage is not the market, but your greed. Control your positions, execute stop-loss orders diligently, always prioritize survival, and profits will follow naturally.