Is Leverage Dangerous? Should Beginners Use Low Leverage? A Answer to That Question

"FX has leverage, so it is dangerous; that is why stocks are superior"

"FX beginners should operate with a relatively low leverage of about 2-3x"

"25x is high leverage, the gateway to ruin"

In the world of investing, especially among people who claim that only index investing is righteous, and among voices in stock investing circles, these kinds of words are repeated like a spell.

Indeed, there are always people who blow through their funds in an instant when leverage is used. However, I will state this clearly: it is a mistake to label leverage as "bad" and to close your mind and avoid it.

Especially for us individual traders with limited funds, leverage can become "the only weapon for those who have nothing to build wealth with."

If you hold the image that "leverage = debt = scary" and are wary of FX, I believe you will find value in reading this to the end.

The reason is that FX is something you encounter somewhere in life; some people invest money, and indeed, nine out of ten people end up reducing their funds and exiting.

But that stems from the problem of people entering FX out of desperation or simply because they suddenly have extra money and want to grow it, driven by greed.

If you properly understand how to manage leverage and adopt a humble learning attitude until you master it, you can become part of the remaining 10% who "increase funds" or at least "do not lose funds."

Therefore, instead of avoiding FX due to a bad impression of leverage, even if you do not enter FX, acquire the correct knowledge so that when you feel like trying, you are prepared. This will ultimately protect you at moments in life when you become interested in FX.

"The real enemy is not how you use it but the fact that you don't know how to use it."

This time, I will share a way of thinking to remove vague fear and transform leverage from a "dangerous potent drug" into a "powerful acceleration device."

One fundamental fear about leverage among many people is the guilt of moving money beyond one's means. But the essence of leverage in investing is not debt.

Leverage is a function that "shortens time."

It is a harsh reality that wealth gaps by capital do exist. For example, a wealthy person with 100 million yen who earns 5% annually will have 5 million yen per year without doing anything. Meanwhile, turning 100,000 yen with the same 5% yield will yield only 5,000 yen per year—the amount that could disappear with one night out.

If you try to build wealth from a small amount with spot trading (1x leverage) alone, your life may end before the compounding effect takes hold.

Here the variable "leverage" appears. It increases capital efficiency and shortens the asset-building period that would otherwise take 25 years to just 1 year. In other words, leverage is a state of "taking risk to buy time with money."

If saving and investing takes time, leverage is about "making time shorter." It’s not about which is better or worse; if you want to rise from a small amount, choosing between them is not obvious.

"But with high leverage, I feel I will inevitably suffer a big injury someday."

That sense of danger is a very important mindset.

However, no one says, "Cars are dangerous because they cause accidents, so walk forever."

You learn driving skills at a driving school and how to apply brakes.

Leverage is the same in this regard.

What many people who exit are doing is "driving a car with no brakes and stepping on the accelerator flat out."

In other words, they are trading with full lots without a stop-loss skill.

- Entering beyond the safe zone driven by emotions

- If the market moves against you, praying that it will go back and not cutting losses

- Widening the wounds by doubling down (averaging up/ down)

This is not leverage being bad; it is simply a failure of money management.

Leverage is merely an amplifier. If your trading skill is positive, it amplifies profits; if negative (unplanned), it amplifies losses.

What is needed then is loss management.

- Even when emotional, do not expose funds beyond a predetermined risk line

- If you feel you are in an "all in the prayers" trade, cut losses

- Before widening losses, reset and re-check your rules

These are the necessary steps.

In that sense, FX reflects your actual ability and mental state like a mirror.

So, concretely, how can you make leverage work for you? Professional traders and EA (expert advisor) developers use an "inverse-design" approach.

Beginners think like this.

× "With 100,000 yen, let me maximize leverage and go all in."

Winning traders think like this.

◎ "The loss I can tolerate on this trade is up to 2% of capital, i.e., 2,000 yen. The loss cut is 20 pips, so calculating back, the order size should be about this."

In this thinking process, the specific multiplier of leverage is not the key. The crucial point is that the acceptable loss when you lose is fixed.

If you place a proper stop-loss order and can control loss amounts, then whether leverage is 10x or 100x, you will only lose the initially defined 2,000 yen.

In practice, when long-term statistics from backtests are available, you already know expected profit and expected loss.

To adjust these expectations, you do not modify leverage. You adjust the amount of lots you trade.

For example, suppose you own 150,000 yen.

If USDJPY is 150 yen,

Trading with 1x leverage, you can trade 150,000 ÷ 150 × 1 = 1,000 units = 0.01 lots (margin just at the edge).

Trading with 25x leverage, you can trade 150,000 ÷ 150 × 25 = 25,000 units = 0.25 lots (margin just at the edge).

(10,000 units is represented as 1 lot)

For example, if you place a buy order for 0.01 lots, backtests show an annual profit expectation of 3,000 yen. Conversely, the maximum drawdown in backtests might be 150 yen.

In this case,

If you buy 0.01 lots with 1x leverage, and

If you buy 0.01 lots with 25x leverage,

The profit expectation of 10,000 yen and the maximum drawdown of 500 yen are the same."

However, with 25x leverage you can place orders up to 0.25 lots, so you can take on trades with a profit expectation of 250,000 yen and a maximum drawdown of 12,500 yen.

With 150,000 yen in capital, 0.25 lots is actually too risky. You need to keep it lower. If you instead take 0.1 lots, the expectation becomes 100,000 yen in profit and a maximum drawdown of 5,000 yen.

If you can grow 150,000 yen to that extent, it’s not a bad scenario.

Of course there is risk, but leverage is a system that “allows you to trade larger lots with less capital.”

However, as the lot size increases, the expected loss also increases.

If you fix your maximum loss at 2,000 yen, you could set a limit like “only up to 0.04 lots.”

In this case, it doesn’t matter whether leverage is 4x or 25x.

(Maintenance margin will differ, so with 4x leverage there is a higher risk of a margin call, which is a caveat)

Understanding this makes it clear that leverage is not scary; it’s the tendency to trade too large a lot that is scary.

From there, you are left with a very rational and cold business decision: limit risk while maximizing the potential return.

Leverage is not the enemy. It is a booster to help you achieve your dreams and a powerful tool to shorten time.

Generally, it makes sense to assume 25x leverage and adjust lot sizes so that potential loss is 2-4% or less of assets.

(Of course, if you are aiming for purely high-interest returns with low leverage, 1-3x is the right range.)

If errors occur regarding leverage, it is not leverage itself that is the problem.

The issue is greed to "make money faster," fear of locking in losses, and the laziness of trading without a plan.

First, start with a small amount, decide how much you are willing to lose, calculate the lot size backward, and practice placing orders. If you cultivate that discipline, leverage will never betray you.

If the expected value of a trade is positive, over time the profits will outweigh the losses.

Face your fears correctly and use leverage correctly. Beyond that, there is a future you can seize even with a small amount of capital.