Everyone has seen the flashy social media posts where people claim to make millions using 100x leverage trading.
Sure, using leverage like this can generate good profits, but only if you’re an extrmely skilled trader.
The harsh reality? Most traders lose money. And one of the biggest reasons for this is the reckless use of leverage.
The fact is, most traders use leverage completely wrong.
Let me show you two examples to prove this point. Both traders start with a $10,000 portfolio and risk 2% of it per trade ($200), with stop losses set 0.5% below their entry price.
Trader 1 (The Wrong Way):
Trader 1 keeps all his capital on a Centralized Exchange (CEX). For each trade, he risks $200 while using 100x leverage, giving him a $20,000 position. When the price drops just 0.5%, his stop loss triggers, and he loses $100.
Sounds harmless, right? But here’s the problem: Trader 1 is using leverage purely to multiply his gains. This approach leaves him exposed to unnecessary risks.
Trader 2 (The Right Way):
Trader 2 takes a smarter approach. He keeps only 5% of his capital on a Centralized Exchange (CEX)—limiting exposure to exchange risks—but still risks $200 per trade. With a stop loss 0.5% below his entry, Trader 2 calculates his position size carefully.
To risk $200, Trader 2 uses 100x leverage on a $400 position. If the price hits his stop loss, he loses exactly $200.
This is the right way to use leverage. Trader 2 isn’t gambling; he’s controlling his risk while keeping his capital efficient.
The Bottom Line:
Leverage isn’t a tool for multiplying your gains. It’s a tool for capital efficiency.
Trader 2 uses leverage to control risk and protect his portfolio. Trader 1? He’s just gambling. One is professional, the other is a disaster waiting to happen.
Stop using leverage the wrong way. Use it wisely.
Comments