Leverage lets you control a larger position with less capital by borrowing the rest. If the trade moves in your favor, profits grow faster. If it moves against you, losses grow just as fast.
It’s like turning up the volume on a trade. Small price moves suddenly matter a lot more, which is why leverage feels powerful but becomes dangerous quickly.
Leverage increases potential returns but also raises risk significantly. Even modest price swings can wipe out capital when positions are highly leveraged.
It also plays a key role in market stress. During sharp moves, leveraged positions can trigger margin calls and forced liquidation, accelerating sell-offs and increasing volatility.
Leverage is usually expressed as a multiple:
- Leverage ratio: Position size ÷ invested capital
- 2× leverage doubles exposure and doubles potential gains or losses
- Higher leverage reduces margin for error
- Extreme leverage increases the chance of rapid liquidation
Small leverage changes can have outsized effects.
A common mistake is focusing only on upside. Leverage magnifies losses just as efficiently as gains.
Another error is underestimating how quickly positions can be closed automatically. Many traders discover their real risk tolerance only after leverage turns against them.
On Stoxcraft, leverage is discussed in Academy content covering risk management and market mechanics.
It’s also referenced in market analysis explaining margin calls, forced liquidations, and why leveraged markets can unwind faster than expected.
