The explanation of leverage is very clear and very important, especially for novice investors and those who have misunderstandings about leveraged trading.

Leveraged trading allows investors to borrow funds to increase their trading positions, thereby amplifying gains (or losses). Leverage is expressed in multiples, for example, 10x leverage means that investors can control 10 units of assets with 1 unit of funds.

Myth: High leverage is equivalent to high leverage

Many people mistakenly believe that the higher the multiple is set, the higher the leverage is, but this is not the case. The true leverage level depends on the ratio between total funds and the amount of the position opened.

Actual example explanation:

10x leverage, use 10% of funds: If 10% of the total funds is used as margin, this is equivalent to no leverage, and the actual operation risk is low. 20x leverage, use 5% of funds: Similarly, the effect is equivalent to no leverage. 100x leverage, use 1% of funds: Same as the above two cases, the risk does not increase.

Key indicator: total position leverage

Total position leverage is the ratio of total funds to the amount of the position opened. If this ratio exceeds 3 to 5 times, even if the apparent leverage multiple is not high, the risk is still very high.

Example:

Total capital: 100,000 yuan Opening amount: 400,000 yuan Total leverage: 4 times (extremely risky)

The importance of risk management

In order to pursue high returns, many investors may use all their principal to trade with high leverage. This practice is extremely risky and may lead to a rapid liquidation.

How to use leverage correctly?

Control the total leverage ratio: try to keep it below 3 times to reduce risks. Use an appropriate margin ratio: do not use all the principal as margin, and set aside some funds to deal with potential risks. Risk tolerance assessment: understand your risk tolerance and do not blindly pursue high leverage. Stay rational: do not be dazzled by high returns, and stable investment is the key to long-term profits.

High-leverage trading is not suitable for most investors, especially those who lack experience and risk management capabilities. Only by understanding the concept of total leverage and using leverage reasonably can you make stable profits in the market. Investment should be aimed at long-term stability, and risks should not be ignored in pursuit of short-term high returns.