What it means
With stop-based position sizing, your risk is set by the stop and size, not by the leverage on offer. Leverage hurts when it tempts oversized positions.
Example
At 20:1, $1,000 controls $20,000, and a 5% move against you wipes out the $1,000.
In practice
Leverage lets a small account take a properly sized position in a market whose contracts would otherwise be too large. Used that way it is a tool: the stop distance and the position size decide the risk, and leverage only determines how much margin the trade ties up.
The useful number is effective leverage: total position value divided by account size. Many professional traders keep it low even when their broker offers far more.
What to watch for
High leverage shrinks the distance to a margin call. A position that cannot survive a normal daily swing will be closed by the broker before your idea has a chance to work, whatever the chart said.
Related terms
4 terms- MarginThe deposit needed to open and hold a leveraged position.
- Margin callA demand to add money because losses pushed your margin below the required level.
- LiquidationYour broker or exchange force-closing a leveraged position because your margin ran out.
- Position sizingChoosing your size so that your stop distance costs exactly your planned risk.