What Is Leverage in Trading? Why It Wipes Out Accounts Faster
Leverage is sold as a way to "earn more with a small deposit". In reality, it's the fastest way to lose your entire deposit. Let's use simple arithmetic to see how it works and what liquidation is.
What leverage is
Leverage is money the exchange or broker lends you, with your deposit as collateral. 10x leverage (1:10) means that for every $100 of yours, you open a $1,000 position. The result of the trade is calculated on the full position — both profit and loss.
The arithmetic, with an example
| Leverage | Your money | Position size | Price falls 5% | Price falls 10% |
|---|---|---|---|---|
| No leverage | $100 | $100 | −$5 | −$10 |
| 1:5 | $100 | $500 | −$25 | −$50 |
| 1:10 | $100 | $1000 | −$50 | −$100 — deposit gone |
| 1:20 | $100 | $2000 | −$100 — deposit gone | — |
In crypto, a 5–10% move in a day is perfectly normal. With 20x leverage, a move like that against you wipes out your deposit.
What liquidation is
When the loss on a position eats up almost all of your collateral, the exchange forcibly closes the position — that's liquidation. It happens automatically and often at an unfavorable price. The price may later turn in your favor, but by then you no longer have a position.
Why beginners blow up their accounts with leverage
- No stop-loss. Without a stop, it's not you who closes the trade — it's liquidation.
- The position is too large. With leverage it's easy to risk half your deposit on one trade without noticing.
- Revenge trading. After a liquidation, you want to win it all back on the next trade — with even more leverage.
- Futures instead of spot. Beginners jump straight into futures without understanding how they work.
If you do use leverage
Experienced traders use leverage not to take on more risk, but to keep less money on the exchange. The risk per trade stays the same — for example, 1–2% of the deposit — and it's calculated from the stop-loss, not from the leverage. Before you try it, take the free Academy lessons on risk management and margin and short selling.
- Beginners: spot only, no leverage.
- Leverage doesn't change your risk — position size does. Risk is calculated from the stop-loss.
- A stop-loss is mandatory. Otherwise liquidation will close the trade for you.
- After a liquidation, take a break — not another trade.
Frequently asked questions
How is spot different from trading with leverage?
On spot, you buy an asset with your own money, and the maximum loss is the drop in its price. With leverage, you trade with borrowed money, losses grow in proportion to the leverage, and your position can be closed by liquidation.
What leverage is safe?
There's no such thing as safe leverage — what can be safe is your position size and stop-loss. Beginners are better off starting with no leverage at all.
Can I lose more than my deposit?
On most crypto exchanges, losses are limited to your collateral — the position is liquidated before that. But you lose that collateral entirely.
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