How Does Leverage Affect Losses In Trading? Complete Guide
There are so many questions on the topic of how leverage affects losses in forex, crypto, and stocks. What happens when you lose on a leveraged trade, do you have to pay back the leverage when you lose, can I lose all my money or more when using leverage, and can you go negative or be in debt?
Before you start trading with leverage you should know all about how losses work when applying leverage because they do behave differently. Without proper risk management in leverage trading, you might suffer larger losses than planned, and if you are truly ruthless you might lose your entire account.
To understand the concept of losing with leverage better, see this guide:
While that is true it doesn’t mean that it’s going to happen to you as long as you understand losses and learn how to anticipate them.
Losses are one of the biggest differences when you look at spot trading vs leverage trading and it is your job as a trader to control them.
The best traders today are making small fortunes in leveraged markets simply because they follow great strategies and they know how to control their losses.
I’ve listed the most frequently asked questions about losses and leveraged trading. Browse your question to find the answer below.
- What happens when you lose money on leverage?
- How much can you lose with leverage?
- Can you go negative in leverage trading?
- Can you go into debt with your leverage broker?
- When leverage trading can you lose more than 100%?
- Do you lose more money with leverage?
- What happens if you lose money on crypto leverage?
What happens when you lose money on leverage?
When you lose money on leverage you only lose your margin capital which acts as risk capital which is the money you have deposited in your account.
Your margin capital is what supports your open positions and takes all the losses.
If you have deposited $500 in your account then you can withstand losses of up to $500 no matter what leverage ratio you use.
The first thing you need to know about losing when trading with leverage is that the losses are proportional to your position size and not to the leverage ratio your choose.
When you lose -1.50% on a position size of $25.000 with leverage you lose the same amount as you would without leverage, the loss is still going to be $375.
For example, if you have deposited $250 in your account and you use 100x leverage to trade $25.000 the effect on your loss will be the same as if you would deposit the full $25.000 in your account and start trading.
Now, what happens to traders when they lose is that they lose money faster due to high exposure to the market with low margin capital.
The losses feel bigger because a large position size loses more money per tick than a position without leverage.
The losses that incur on your leveraged account are held open until you close out the position.
This means that until you have exited the position you haven’t actually lost anything, only on paper.
The open loss with leverage is later realized when you close the trade and the money is taken from your margin capital.
The calculation is made by your broker and the money is withdrawn from your balance instantly.
In high leverage trading, your losses increase further and it becomes more important for the trader to manage the risk associated with leverage trading.
Learn more about risk management in our high leverage trading strategy guide.
How much can you lose in leverage trading?
The amount of money that you can lose with leverage is proportional to your initial investment but in some rare cases, you can lose more money than you have deposited if you choose a malicious off-shore broker.
For those who trade on a regulated and reputable broker, crypto exchange, options platform, or stock broker will only lose the money that they have initially invested in a worst-case scenario.
You can’t lose more even though you increase the ratio of leverage.
This is the same even when you compare forex vs crypto vs stocks.
However, your overall position size is what ultimately causes you to lose, and also how fast you lose your money.
A larger position will lose money faster than a smaller position simply because every point in price is worth more money.
For example, if you lose 2% on a $500 trade your total loss is $10 while a 2% loss on a $50.000 trade is $1000.
This can be controlled with your leverage ratio and as you can see, the more leverage you use, the faster you lose your money.
Can you go negative in leverage trading?
Yes, you can go negative when trading with leverage if your broker doesn’t have negative balance protection.
This only affects some types of asset classes such as Forex, Commodities, and Stocks, whereas crypto exchanges have built-in negative balance protection to prevent further losses than what a trader can handle.
A negative balance happens when you borrow money on your margin balance and suffer losses that are larger than your initial deposit.
Let’s say that you make a deposit of $1000 and use 1:50 leverage to trade stocks.
If you open a position worth $50.000 and the market falls 3% in a short period of time, here is what happens.
A 3% loss on a position size worth $50.000 is -$1500.
Since you only deposited $1000 you are now negative -$500.
This can only happen if your broker doesn’t have negative balance protection.
You should always avoid trading with a broker that doesn’t offer this type of protection since you can never know how the market will react and we all make mistakes.
If you go negative with leverage it is your responsibility to pay back the money to the broker.
Can you go into debt with your leverage broker?
Yes, you can go into debt with your broker if you choose one that doesn’t have negative balance protection or government regulation such as SEC or FCA and you take on more losses than your margin capital can support.
If you sign up with a broker that allows for a negative balance to occur you can go into debt.
All it takes for you is to lose more money than you initially deposited.
This is easily done if you overleverage and lose big.
Unfortunately, this still happens to many traders each year and it’s something that I hope will sooner or later disappear as a problem due to tighter regulations and requirements.
For example, all crypto exchanges have a built-in system that prevents any trader from reaching a negative balance.
The trading platform takes care of this itself and the worst thing that can happen is that you suffer a full liquidation from leverage.
If you make a deposit of $300 and your overall losses mount up to -$1500 on any given trade you will go into debt and owe the brokerage $1200.
When this happens I recommend that you contact the broker to see how you can resolve this immediately and follow instructions to not get in further trouble.
You should not get discouraged from trading if this happens, it’s just a mistake, and you can still win back the losses you have paid.
This time keep in mind that if you leverage trade forex, choose a reputable high leverage forex broker.
When leverage trading can you lose more than 100%?
Losing more than 100% is possible when using leveraged contracts, however, it all depends on the trading platform you choose.
If the platform doesn’t support negative balance protection your account balance might go below 0%.
When this happens your account balance will show a negative number.
If you open a large leveraged position and the market turns against you it is possible to lose more than 100% if you are not properly protecting your risk.
This can happen to beginners who are not careful and have poor risk management.
This is very rare but if you are unlucky with the choice of broker and the market throws you off guard it can happen.
Make sure that you always stick to a negative balance protection broker that is regulated by your local government.
Most of the popular brokers will keep you out of problems but it is always wise to look up the platform you are thinking of joining.
Most operators will flag on their home page that they have negative balance protection but if you can’t find it make a quick google search or ask the support staff in the live chat.
To educate yourself further on how a leverage position is, see this guide:
Do you lose more money with leverage?
Yes, you do lose more money with leverage since you are capable of entering the market with much more capital while only investing a fraction of your own money as a margin.
The leverage ratio itself doesn’t make you lose more money but when you use it to open big positions then you can incur larger losses than you are used to.
What would be a normal 4% loss for a $400 account size will not be the same when you add 75x leverage to the mix.
An account of $400 with a leverage ratio of 1:75 means that you can enter the market with a position size worth $30.000.
That 4% drawback would initially translate into a loss of only -$16 but with 1:75 leverage it has now grown to a loss of -$1200.
This drawback would liquidate your entire account if you had not added a protective stop.
In this example, it is clear that leverage makes you lose more money and the true story is that you lose more money faster.
This is because a large position shows a bigger loss for each point of drawback.
A drop of 15 points or 15 pips with a $400 position is nothing compared to a 15 pips loss with a $30.000 trade.
Keep this in mind when you are trading and always choose what is the best leverage level for a beginner.
What happens if you lose money on crypto leverage?
When you lose money in crypto leverage trading the loss is directly proportional to your full position size and the bigger the position is the bigger the drawback becomes.
For example, if your initial investment is $500 and you use a leverage ratio of 50x, your total loss will be calculated on the maximum position size which would be $25.000.
Let’s say that you lose -1.50% on your next trade.
The loss is calculated on the full position size of $25.000 and not your margin balance of $500.
In this case, the total loss would be $25.000 x 0.015% = -$375.
Crypto exchanges that offer leverage are great at protecting the trader and there is no way for a crypto trader to see a negative balance in his account.
This is not the case though with other leverage products such as forex, stocks, and derivatives.
If you lose money on a leveraged crypto trade you simply take the total loss in percentage and subtract the total loss from your account balance.
The leverage ratio used is the most important thing when it comes to losing money.
A higher ratio does mean higher risk and you should be aware of how to manage your risk properly before you start.
Make sure you know your optimal leverage ratios for crypto trading before you start and in our crypto leverage trading strategy guide, we teach some great ways that you can protect your downside with simple strategies.
How do you calculate a leveraged loss?
When calculating a loss on a leveraged trade you take the total position size and subtract the loss in percentage or points.
For example, if you open a trade worth $25.000 and take a -1.20% loss you lose $300.
Here is the calculation:
$25.000 x 0.0120% = $300.
When the loss is realized it will be taken from your margin capital, not from the leverage you have used.
Let’s say that you made a deposit of $2500, you use a leverage ratio of 1:10 to open a position worth $25.000 and lose -1.20%.
The total loss is $300 as shown in the example above and this money will be taken from your initial deposit of $2500.
The money you have left in your account is now $2200.
Using a crypto leverage calculator will help you understand how much money goes into each trade so you can plan and reduce potential losses.
The result from the calculation will show you the amount of money you need to deposit as margin capital which will also be your risk capital.
Can you lose all your money in leverage trading?
It is possible to lose all your money in leverage trading if you are not using proper risk management.
Since the beginning, traders who borrow money have gotten liquidated and lost all their money, even professional traders on Wall Street.
When your open position suffers a loss that is close to the amount of the initial deposit your broker will first send you a margin call telling you that you are running out of cash.
If the position proceeds to lose more money, you will run out of margin and you will lose all your money.
Trading with leverage is a high-risk game and every trader that joins a leveraged broker should know how to protect their downside.
Since it’s possible to open trades that are larger than your first investment, you run the risk of losing all your money if you are not careful.
To prevent losing all your cash I recommend that you read our tips for leveraged traders and implement all the risk mitigation strategies listed.
Also, see our guide on why brokers offer leverage to beginner traders to understand where the risks come from.
Is it possible to lose more than you invest with leverage?
Yes, you can lose more than you invest when speculating with leveraged contracts but only happens when you choose a shady broker without negative balance protection.
Since forex trading and other products let us trade with more money than we have initially deposited the losses are greater than normal.
A big position will generate big losses if the market turns against us and if you don’t stop out the position before it hits 0% margin, you can lose more money than you have invested.
In this case, you will go into debt with your operator and you need to resolve the issue as fast as possible.
Contact the support team and make sure that you handle the matter with care to avoid further conflicts.
This is a worst-case scenario that should not happen if you choose a reputable broker that operates under government regulation.
Make sure that you choose a legitimate high leverage stock broker or high leverage crypto exchange.
How 1:100 leverage affect losses
When trading with 1:100 leverage your losses will be 100 times larger than what they would be if you traded in the spot market.
The effect 100x has on a position can be described with a simple example.
Below is a trade that loses -0.80% with and without a 100x ratio.
The trader has made an initial deposit of $800 and will maximize the position size.
|-0.80% (1:1)||-0.80% (1:100)|
How 1:500 leverage affect losses
At a leverage ratio of 1:500 the losses will multiply by 500 times.
A normal loss of $15 will become 500 bigger and this can result in very large losses for the trader.
See below how a loss of -0.50% affects a trader’s balance when using 0x and 500x leverage.
We will assume that the trader has made an initial deposit of $2000.
|-0.50% (1:1)||-0.80% (1:500)|
How 1:1000 leverage affect losses
At a ratio of 1:1000 a loss will affect the account very heavily since it will increase by 1000 times.
Your standard loss of $2 will be worth $2000 which in many cases will instantly liquidate the trader.
Below is an example to show you how a loss of -0.20% would affect a trader’s account at 0x and 1000x leverage.
We will assume that the trader has made an initial investment of $500
|-0.20% (1:1)||-0.20% (1:1000)|
Do you have to pay back leverage when you lose?
When you lose on a leveraged trade you do not need to pay back the leverage since the loss does not affect your leverage ratio.
Instead, when you lose, your margin balance will cover the loss and all the leverage you have used for the position will be returned to your broker.
The borrowed money you receive from your trading platform is not affected by any loss.
The only thing your need to worry about when losing money on a leveraged position is to have enough margin balance in your account to cover the loss.
Your margin balance is the initial deposit that you made when you registered with the broker.
All profits and losses will be deducted or added to your margin balance when you close out each position.
This is a complete guide on how leverage affects losses in trading forex, crypto, and stocks. The concept of losing money with borrowed money can sometimes be tricky to understand but when you learn how to separate the leveraged money from your own margin capital it all makes more sense.
After reading this article you should have gained a good understanding of:
- How leverage affects losses
- How you can calculate your own losses
- What happens during a market loss
- How much you can lose with leverage
As always, it is not the ratio you choose that control your losses, instead, it is the position size that you choose that will ultimately cause the losses. You can trade 500x leverage a small position size and risk less while at the same time you can trade 50x and risk more. Make sure you know how to control your risk before you enter the market.