Leverage in trading: what it is and how losses grow

Leverage in trading means controlling a bigger position than your own money could buy, usually with borrowed money. At 2:1 leverage, each $1 of yours controls $2 of investments. Gains and losses on your own money grow by the same multiple, and at high leverage a small move can wipe you out.

Key points#

• The leverage ratio is the size of your position divided by your own money.
• At 2:1, a 10% move becomes a 20% gain or loss on your money. At 10:1, it becomes 100%.
• A 10% fall wipes out a 10:1 position. A 50% fall wipes out a 2:1 position.
• Leverage shows up in margin accounts, CFDs, futures, options and leveraged ETFs.
• Borrowed money costs interest, so leverage raises the bar to break even.

Risk note. Leverage makes losses bigger as well as gains. You can lose more than you put in.

What is leverage?#

Leverage is using borrowed money, or a contract, to get more exposure than your cash alone buys. The SEC’s investor office says leveraged strategies try to make returns bigger in three ways: borrowing on margin, using options, or buying funds that use leverage (Investor.gov, June 10, 2021).

Exposure is how much money rides on a price move. If you hold $20,000 of stock, a 1% move changes your position by $200, no matter how much of that $20,000 was yours.

How do you work out a leverage ratio?#

Divide the size of your position by your own money. That is the leverage ratio.

• $10,000 position ÷ $10,000 of your money = 1:1, no leverage.
• $20,000 position ÷ $10,000 of your money = 2:1.
• $100,000 position ÷ $10,000 of your money = 10:1.

There is a quick way to see the danger. Divide 100% by the leverage. That is how far the price can fall before your money is gone. At 2:1 it is 50%. At 10:1 it is 10%. At 50:1 it is 2%.

How leverage makes losses grow#

Leverage multiplies every move on your own money. The table below starts with $1,000 of your money and leaves out interest and fees.

The SEC gives a simple example. Say a stock bought at $50 rises to $75. Paid in cash, you made 50%. Bought with half borrowed, you made 100% before interest. But if the stock falls to $15, the cash buyer loses 70%. The margin buyer loses all $25 they put in and still owes the broker $10 plus interest.

Losses also hurt more than gains help. After a 50% loss, you need a 100% gain to get back to even. Leverage makes those deep holes more likely.

Where does leverage show up?#

Leverage shows up in five common places.

Margin has its own guide: margin trading walks through a margin call. CFDs are covered in our CFD trading guide. For funds that build the leverage in, see leveraged ETFs.

Common mistakes#

• Looking only at the upside. The same multiple works on the way down.
• Forgetting interest and fees. A flat year with leverage is a losing year.
• Using high leverage on a volatile asset. A normal daily swing can trigger a margin call.
• Thinking a stop-loss order caps the loss. Prices can gap past it overnight.
• Adding leverage after a winning streak, when a position is already at its largest.

Try it on Tactfolio#

Tactfolio strategies never borrow. They do no margin and no short selling. They can hold leveraged ETFs, though, since those are ordinary US-listed funds. The Leverage Rotation Strategy shows what that looks like. It holds a 3x S&P 500 fund only while the S&P 500 is above its 200-day average, and Treasury bills otherwise.

Its hypothetical backtest, as of September 25, 2026, runs from mid-2009 using real fund prices. It grew about 25% a year, against about 15% for the S&P 500. It swung about twice as much as the S&P 500, and its risk-adjusted return was lower. Its worst drawdown was about 52%, against about 34% for the S&P 500. It lost about 40% in 2022 (Tactfolio). To test leverage math on your own numbers, try the free leverage calculator. It is an education tool, not a trading feature.

Common questions#

What does 10:1 leverage mean?#

It means each $1 of your money controls $10 of exposure. A 1% price move becomes a 10% gain or loss on your money. A 10% move the wrong way wipes out everything you put in.

Is leverage good or bad?#

It is neither on its own. It makes good trades better and bad trades worse, and it adds costs. The SEC warns that with margin you can lose more than the money you put in.

What is a safe leverage ratio?#

No ratio is safe in every market. Lower leverage gives prices more room to move before your money is gone. At 2:1, a 50% fall wipes you out. At 1:1, there is no borrowing at all.

Do leveraged ETFs use leverage?#

Yes, inside the fund. The fund uses swaps and futures to aim for a multiple of the index’s daily move. You do not borrow, so you cannot lose more than you put in. But the daily reset can make long-term results drift far from the stated multiple.

Sources

• Leveraged Investing Strategies: Know the Risks Before Using These Advanced Investment Tools, Investor.gov (SEC), June 10, 2021, accessed October 16, 2026
• Investor Bulletin: Understanding Margin Accounts, Investor.gov (SEC), accessed October 16, 2026
• Futures Glossary: Margin, Commodity Futures Trading Commission, accessed October 16, 2026
• Updated Investor Bulletin: Leveraged and Inverse ETFs, Investor.gov (SEC), accessed October 16, 2026
• Leverage Rotation Strategy, Tactfolio, figures as of September 25, 2026, accessed October 16, 2026

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