This article is for educational purposes only. Trading with leverage, margin, futures, or derivatives carries a high risk of rapid or total loss. This is not financial advice and should not be used to make trading decisions.
10 Steps Of Top Risk Management In Leverage Trading
Leverage trading is a high-risk arena where position size and volatility can move your account very quickly, and without solid risk management a single trade can still wipe you out.
At Leverage.Trading, we teach traders that managing leverage is more than just setting a stop-loss. It’s about understanding the mechanics of margin, avoiding overexposure, and protecting yourself from the hidden risks that wipe out beginners. If you’ve never considered the dangers of over-leveraging, or you’re unsure how to structure a trade to survive sudden market swings, you’re already gambling with your capital.
In this guide, I’ll break down 10 proven strategies that experienced traders use to protect themselves in leveraged markets, from crypto futures to forex. Whether you trade with relatively low leverage or experiment with more aggressive settings, these principles are what keep serious traders in the game and help prevent errors like oversized entries, reckless cross margin, or trading without negative balance protection.
Key Takeaways
- Leverage trading can multiply both profits and losses, making risk management the most critical skill for survival.
- Disciplined position sizing, strict stop-losses, and calculated margin allocation are non-negotiable for long-term success.
- Avoid cross margin unless you fully understand the exposure; use isolated margin to contain risk to a single trade.
- Choosing the right leverage ratio is as important as choosing the right trade—over-leveraging is the fastest path to liquidation.
- Veteran traders treat risk management as their primary edge, allowing them to stay in the game through volatility and market downturns.
In this guide
What is risk management?
Risk management is the technique of preserving your capital while planning a trade, entering a trade, and exiting a trade. Risk in leverage trading is the other side of the coin that most traders look beyond because they don’t understand it and don’t know how to control it.
Since we can’t have rewards without risks we have to take responsibility when trading the financial markets and be wise about how to structure a trade. The best risk managers are those who know how to control their losses so that individual trades do not damage the overall trading account.
As a trader, you will lose around 50-60% of the trades, and it is your job to minimize the harm of those losses. Remember, risk management is not about avoiding losses completely, that’s impossible.
The best way to manage your risk is to prepare and analyze each trade and think about the worst possible outcome for this position. If your analysis tells you that this trade is too risky, you should wait for another opportunity or change your plan.
The biggest misstep retail traders make is to ignore risk and let chance decide how bad the downside gets.
This might work out during a few lucky trades but eventually, the markets will turn sour and your position will be in heavy losses. This is where risk management comes in and takes care of the possible downside and makes it more controllable.
Understanding the risks
The main risk – Leveraged trading is riskier because it enables you as a trader to open bigger positions than your total account size. This expanded exposure is the core idea behind how leverage is used in trading, and it is the reason losses accelerate quickly when markets move against you.
For example, if you were to buy the Tesla stock at 1:2 leverage and you have deposited $1000 in your account you would now be able to buy the Tesla stock for $2000.
If Tesla were to drop 20% in value over a couple of weeks, your position would lose 40% due to the 1:2 leverage ratio.
This is the main risk with leveraged trading and once you understand this concept you will be in a better position to control your possible downside with proper risk management tools.
Liquidation – Leverage is also riskier because it puts your whole account in jeopardy due to the liquidation factor.
Liquidation in leverage trading is a loss of all your trading capital due to losses that your margin balance could not support.
Before you get liquidated, your broker will give you a warning sign called the margin call that will notify you that you are running out of margin capital.
Since you have opened a larger position than normal, your account will not be able to withstand losses like a normal trading account.
As you increase your leverage and your margin shrinks, use our margin call calculator to avoid getting margin calls.
Unexpected losses – This is probably the reason for most of the losses and it happens because the trader does not expect how leverage will affect the position in a live market scneario.
Your position might go from break-even to a loss of -$250 in a matter of seconds if you are not careful. This is common among traders who are still getting used to leveraged products and have not seen a full loss cycle yet.
Greed – Greed is another big driver of losses, especially when traders focus on the upside and start using borrowed funds to open positions that are far larger than they can handle on the downside. Once a trader gets attached to big winners it can be hard to step back from trading large size.
It often takes a couple of heavy losses before a trader understands that this approach does not work and that the only sensible way to even consider using leverage is to start with a clear risk plan. If you have ever lost more money than you could afford due to overtrading, then you should definitely keep reading if you want to stay in the game.
Best risk management strategies in 10 steps
Below is a list of my 10 best strategies for risk control and they hold true for any type of trading style. No matter if you are a day trader, swing trader, or position trader, these 10 steps will bring you better results thanks to more reasonable planning. Take your time and read each strategy carefully, who knows, it might just be what you need to reach the next phase in your trading journey.
1. Plan your trade
When it comes to preparing for a trade, many traders fail to write a complete plan before they enter the market. The old line “planning makes perfect” fits trading very well, and no serious trader should enter a market without a written plan. That’s an expression that holds very true in financial markets and no trader should enter a market without a written down plan. A full plan consists of:
- Your leverage trading strategy (entry, exit, risk/reward)
- Choice of market
- Position size
- Maximum risk tolerance
The idea of having a trading plan is to not leave out anything to chance, meaning, the amount you are willing to lose is written down already and you know what to expect from your trade. This will help you calculate your expected return on the trade to see if it fits a healthy risk and reward ratio.
Since leverage increases the impact of each trade in both directions, you have to assume a higher risk of loss on every position you open.
2. Use a stop loss
A well placed stop loss will not save every trade, but it will protect you from many of the worst outcomes, and it is one of the most important tools you have.
First of all, it controls and cuts the losses automatically. Second, it enables you to quantify your strategy by telling you the exact amount you are willing to lose on each trade.
For example, if you accept to lose $25 on each trade and you add a strict stop loss to every order, you can calculate how much you would lose if you lost 5 trades in a row.
Use our stop loss calculator to add the ideal amount of risk to your trades by choosing your entry price and your risk in percentage
Now, if you add your positive expectancy to this calculation you will find out how profitable your strategy is. Those who trade without a protective stop do not take responsibility for their trading and they will end up in disaster, it’s not a question of if, it’s a matter of when!
3. Calculate your margin
Your margin capital is what fuels your trades, and understanding how margin functions as collateral in trading is essential for controlling your downside. If too much of your margin is committed to a single position, one unexpected move can erase a large portion of your account.
If you commit too much of your margin to a single position, for example seventy percent of your available margin, one bad trade can wipe out that chunk of your account in one move. This would put you behind several weeks or months of trading.
This becomes a strong risk tool because you always know how much you can lose on the trade and you decide in advance how much of your total capital you are willing to put at risk.
Use our leverage trading calculator to see exactly how much margin you need for each trade.
4. Never use crossed margin
Crossed margin is a way of trading where every single trade has access to all your margin funds in your account. This means that when you open a leveraged trade that only requires 10% of your margin, you allow this position to use the rest of your funds in case the market moves against you.
Theoretically, each individual trade that you open runs the risk of depleting all your capital in case of a big loss.
Instead, always use isolated margin to allocate only a pre-set amount of margin for each position. This way you can only lose the amount of money used when the trade was opened.
Many traders struggle with the difference between cross margin and isolated margin, and each broker handles it slightly differently, so you need to read the small print carefully before you fund an account.
5. Position sizing is key
Your position size is what eventually will affect your total loss in case of a drawdown and it’s the oldest risk management tool in the book.
If you size a position far beyond what your account can comfortably handle and the market turns, you can get into serious trouble very quickly. This is why it is important not to let the extra buying power from leverage tempt you into trading sizes you would never touch in a normal spot account.
My first big loss happened when I opened a position of $100,000 in Bitcoin. A few minutes after I opened the position I was down -3.50% which translated into a loss of $3500.
That was a big chunk of my trading capital and I was stunned over how fast that market turned on me. The bottom line is simple, position size is what ultimately controls the size of your losses. The market will hit you with losses of 2-5% and it’s up to you to decide if you want to lose 5% with $100,000 or $10,000. Be smart and keep your size small until you have real data on how your strategy behaves under leverage.
6. Determine your risk per trade
With calculating your margin, determining your total risk per trade is crucial to have a positive expectancy in trading. You need to know exactly how much you can lose on each position to calculate your risk-reward ratio. Write down your total risk per trade and then calculate how many trades you can stand to lose in a row before you are wiped out. You should be able to take at least 50-100 trades before you are out of capital. If you only last 10-30 trades you are taking on too much size and it’s time to scale down.
7. Use the 1% rule
The 1% rule says that you should only risk 1% of your total investment account in one single trade and it is so effective that it will take care of almost all your risk management alone. For many traders, simply following the 1% rule together with a consistent stop loss already covers a large part of the risk problem. To know how much 1% of your total account balance you can use this simple calculation.
Total account balance / 100 = 1%
Example: $5000 / 100 = $50
In this example, we have a $5000 trading account and the 1% rule tells us that we can’t risk more than $50 on each trade. Now, you can open positions that are larger than $50 but you have to keep in mind to add your protective stop at a distance that only allows for a $50 loss.
8. Know your risk/reward ratio
As you level up as a trader you will find that your risk-reward ratio is one of the most important aspects of long-term growth. If you don’t know your risk-reward you can’t accurately calculate what you expect to make and lose on each trade. If you leave these factors to chance, sooner or later the market will punish you for it.
This boils down to math and the better skewed your risk-reward is in your favor the bigger your edge is. Your risk-reward doesn’t directly make you lose less money but by being aware of this factor you can adjust the amount of money you are willing to lose to have a healthy long-term trading strategy that doesn’t eat from your profits.
You are either a very accurate short-term trader that nails 60-75% of your trades or you are a longer-term trader that wins 40% of the time. It doesn’t matter which kind of trader you are, you need to have a positive risk-reward profile. A short-term trader is going to make more wins but they are significantly smaller than the wins of a long-term trader. On average, a short-term trader might win $500 per trade while a long-term trader can win up to $5000 per trade. If you allow too many trades with large losses, your risk and reward profile breaks down and the plan stops being sustainable. Keep track of your risk-reward profile and calculate your expected return.
Related: Risk Reward Ratio Calculator
9. Choose your market wisely
It’s obvious that cryptocurrencies are more volatile than national currencies and that stocks are riskier than long-term bonds, but which market should you choose and why? There are some general guidelines for picking the right market.
First of all, are you a big risk taker?
Can you handle a lot of pressure?
If the answer is yes, then you might be fit to trade crypto.
If not, you might be better off using leverage for long-term investing in large-cap stocks for the long term.
For most retail traders, it is usually better to focus on a market that is less volatile but still liquid and active. If you need to pick a cryptocurrency, choose one of the bigger coins that have lower volatility on average. This way, when you are wrong on a trade, the move against you is less violent on your account.
It also depends on if you are a short-term or a long-term speculator. Most short term traders need volatility to create enough movement for their setups, while long term investors focus more on finding assets that can grow over time. This is an indirect risk-management tool that could save you from losses.
10. Negative balance protection
If you are trading forex, stocks, or cryptocurrencies on a CFD broker you absolutely must use a broker that has negative balance protection.
Negative balance protection is a system that protects the trader from ever going into debt on his trading account.
As this can happen with leverage it is of most importance that you always check your broker before you deposit any funds. Leverage stock trading through CFD accounts usually goes hand-in-hand with a negative balance protection system.
This is a type of “last resort” risk-management tool that will save you in the event of a total failure.
When you open a large position by mistake and your internet goes down before you had the time to add a protective stop you might lose all your funds, but with negative balance protection, you will at least not go into debt with your broker.
Most traders that trade forex with leverage are used to seeing the negative balance protection being highlighted on the front page as it is a very common thing for traders to get into debt with their broker.
As you are trading with negative balance protection, your leverage ratio still matters even though you can’t get liquidated.
For example, learning how to choose leverage ratio for forex is crucial as it should not exceed 1:200 for scalpers and 1:20 for swing traders.
I know several cases where traders have gone into heavy debt, sometimes more than $25,000, because they traded with high leverage on brokers that did not offer negative balance protection. If you could only check one feature of your next platform it would be this one!
How different products changes the risk
As a trader, you should know the different risk factors of the different leveraged products available in order to better choose which one is best suited for you. Some products are less risky and could be a better choice for you seen from a risk management point of view.
Take a look at the list below and learn what separates our most commonly traded products for Forex, Stocks, and Cryptocurrency.
There are different ways to control your risk when you compare crypto vs forex vs stocks which has a lot to do with how the markets behave in general.
Options
Options contracts are a type of derivatives contract but they are very straightforward when it comes to direct risk to your capital since the total risk per trade is directly limited to the premium you pay.
When you buy an option you pay a premium, let’s say $150, and this is all you stand to lose if your trade were to fail.
Now, the way to describe how options leverage works is by comparing the difference in the premium paid for the options contract and the underlying price for the stock itself.
This takes care of 100% of the risks involved when it comes to open positions and it’s almost as if you have a locked-in stop-loss order built into the contract. Options are more complex to learn and operate, but in terms of direct account risk they offer a clearly defined downside and generally use lower effective leverage.
CFD
CFD contracts sit at the high end of the risk spectrum in leveraged trading. There are many well known cases of traders going into debt because they traded CFDs with very high leverage and without negative balance protection.
Since many CFD platforms offer very high leverage and also make their own market, these products are extremely risky for traders who lack experience with leverage and fast downside moves. CFD platform also offers crossed leverage and this can be deadly for an account if one single trade goes bad.
Crossed margin, as described earlier in this article, is a mechanic that enables one single position to access all your margin capital in your account. This means that one single trade can liquidate your entire portfolio.
Derivatives
Derivatives trading such as futures, perpetual futures, and swaps also carries significant risk, even if the profile can differ from CFDs.
Derivatives are contracts that derive their value from an underlying asset and are generally accompanied by high levels of leverage.
Most derivatives give you an option to buy or sell a contract at a future price with an expiration time, for example, futures contracts.
This gives your trade a limited amount of risk seen to how long the position can stay open. However, derivatives contracts such as perpetual swaps have no expiration date which is seen as riskier. The level of leverage offered is similar to CFDs and since derivatives are traded on a broker you don’t really know how reliable the counterparty is.
Many derivatives contracts have been shut down due to low liquidity or because a company has gone bankrupt and this is what makes these contracts unreliable.
Derivatives are famous for offering up to 100x leverage and other asset classes.
Related: What is leverage in futures trading?
ETF
ETFs, or Exchange Traded Funds, are among the less risky leveraged contracts you can find. They are normally traded on a big stock exchange and carry lower levels of leverage, usually at a maximum of 1:10. ETFs are supported and backed up by large liquidity providers and they are normally seen as a more sophisticated way of investing in a stock, bond, stock index, or commodity.
ETFs are investment funds that trade on exchanges and they are generally easier to buy and sell during the day than traditional mutual funds. Most mutual funds have a set schedule for when investors can buy or sell, typically once per month or once per week, but ETFs can be bought or sold on an intraday basis. This structure can reduce some operational risks and is often used by more conservative investors who want limited leverage on longer term positions.
What other traders ask
How do you manage risk in leverage trading?
There are a couple of good techniques to control your exposure in the market. Below is a list of the three best tips:
1. Stop-loss
2. Calculate your margin
3 Don’t use crossed margin
What is leverage trading risk?
The added risk factor on leveraged trades is the added buying power that traders get access to. This creates larger swings in both positive and negative directions of your account and if you are not careful, one single trade can wipe you out if you use too much leverage.
Does leverage affect risk management in Forex?
Yes, it does. The more leverage you use the riskier it is to enter the market. A bigger position always carries more risk than a smaller and when you are wrong you will take a bigger hit to your overall account.
What happens if you lose a leveraged trade?
Depending on how much leverage you use and how large your position is, you can lose anything from a small fraction of your account to the entire balance on a single trade. Always select a ratio that you are comfortable with and don’t overdo it.
How do you calculate risk leverage?
To calculate your total stake per trade you need to know how to calculate your margin used per trade. Check out our cauculator for calculating leverage in forex to learn exactly how to do it.
How do you build a trading risk management strategy?
First of all, read this guide to get a good understanding of what all the risks are. Then, start by incorporating all the tips and techniques I’ve listed above. Once this is done you will have a proper strategy for how to manage your trade.
How do you choose leverage in trading?
If you are still building experience with leverage, it is usually safer to stay around a 1 to 5 or 1 to 10 ratio. Traders who already have several years of experience and a proven strategy may choose to go higher, for example up to around 1 to 25, but anything beyond that carries a very high liquidation risk that rarely makes sense for most setups.
Final thoughts
This guide has walked through how to think about risk management in leverage trading, covering the well known risks and also some of the more subtle factors that many traders overlook early in their careers.
As a trader, it’s your job to make sure that you have full control over your possible downside and you don’t want to leave anything to chance.
To be different and level up as a trader you need to take responsibility for all the actions you take and all the actions that you don’t take. Be different, and be aware of the risks!
Anton Palovaara
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.
