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

"FX is dangerous because of leverage, and that's why stocks are superior"

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

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

In the world of investing, especially among those who advocate index investing as the only truth or in stock investment channels, such phrases are repeated like spells.

Indeed, there are always people who blow their funds in an instant by applying leverage. However, I will state this unequivocally: it is a mistake to decide that leverage = bad and to avoid it with a closed mind.

Especially for us individual traders with limited funds, leverage can become "the only weapon for the underdog to build wealth."

If you already have the image that "leverage = debt = scary" and avoid FX, I believe you will gain a lot by reading this article to the end.

This is because FX is something you will encounter somewhere in life, some people will invest money, and indeed 90% of people will lose money and exit.

However, this is the result of the drawback that arises when people enter FX on a whim out of gambling impulses when they are in some money trouble or when they suddenly have extra money and want to grow it.

If you properly understand how to handle leverage and learn with humility until you master it, you can become part of the remaining 10% who "increase their funds" or at least avoid "decreasing funds."

Therefore, instead of shying away from FX due to a bad impression of leverage, acquire correct knowledge in advance, even if you do not participate in FX, so that when you feel like trying, you are prepared. This will protect you in the long run at the times when you become interested in FX.

"Not knowing how to handle it" is the real enemy.

This time, I will share a way of thinking that removes vague fear and turns leverage from a "dangerous drug" into a "supercharged accelerator."

Behind many people's fear of leverage is something like guilt for moving money beyond their means. However, the essence of leverage in investment is not debt.

Leverage is a function that "shortens time."

Harsh reality, but the gap in wealth due to capital is absolute. For example, if a wealthy person with 100 million yen funds invests at 5% annual return, they automatically earn 5 million yen per year without doing anything. On the other hand, if someone saves 100,000 yen and achieves the same 5% return, they would gain only 5,000 yen per year—an amount that can disappear at a single drinking party.

Trying to build wealth from a small amount with cash trading alone (1x leverage) would exhaust your life before compounding has a chance to work.

This is where the variable of "leverage" enters. It increases capital efficiency and shortens the time to accumulate assets that would normally take 25 years into about one year. In other words, leverage is "taking risk and buying time with money."

If regular investing leverages time for long-term growth, leverage investing leverages time by shortening it. Neither is inherently good or bad; if you want to rise from a small amount, the choice between them is obvious.

"But with large leverage, I feel I will eventually suffer a big loss."

Having that awareness is a very important mentality.

However, no one says, "Car crashes are inevitable, so I will walk forever."

You learn driving techniques at a driving school and how to use the brakes.

Leverage is the same in principle.

Most people who exit prematurely are in a state of "driving without brakes and stepping on the accelerator hard."

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

- Entering based on emotions, exceeding the dangerous limit of funds

- When prices move against you, praying that it will come back and not cutting losses

- And further adding to positions (averaging up or down) to widen the wound

This is not that leverage is bad; it is simply that you lack proper money management.

Leverage is just an "amplifier." If your trading skill is positive, it amplifies profits; if negative (without a plan), it amplifies losses.

What becomes necessary is loss management.

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

- If you feel you are in an "ointing/trading on a prayer," cut losses

- Before widening the wound, reset and check your rules

This is what is needed.

In that sense, FX is a "mirror" of your ability and state of mind.

So, concretely, how can you make leverage your ally? Professional traders and EA (automatic trading) developers do "reverse-engineered design."

Beginners think as follows.

× "With this 100,000 yen, I'll maximize leverage and go all in."

Successful traders think like this.

◎ "This trade can tolerate a loss of 2% of funds (2,000 yen) out of 100,000 yen. The stop-loss width is 20 pips, so calculating backward, the order size should be around this amount."

In this thinking process, the question of "how many times leverage" is not important. What matters is that "the amount you can lose when you fail is fixed."

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

In fact, when long-term statistical data can be obtained through backtesting, the expected profit and expected loss are known.

In this case, to adjust the expected profit or loss, you do not change leverage. You adjust the number of lots you trade.

For example, suppose you own 150,000 yen.

If USD/JPY is 150 yen...

With 1x leverage, trading with 150,000 ÷ 150 × 1 = 1,000 currency units = 0.01 lots is possible (margin just maintains).

With 25x leverage, trading with 150,000 ÷ 150 × 25 = 25,000 currency units = 0.25 lots is possible (margin just maintains).

(We express 10,000 currency units as 1 lot)

For example, if you place a buy order for 0.01 lots, backtesting shows an annual profit expectation of 10,000 yen. Conversely, the maximum drawdown in backtests might be 500 yen.

In this case,

With 1x leverage and buying 0.01 lots,

With 25x leverage and buying 0.01 lots,

The assumption of 10,000 yen profit and 500 yen maximum drawdown remains the same.

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

With 150,000 yen, 0.25 lots is actually too risky. You need to keep it lower. If you set it to 0.1 lots, the expectation is 100,000 yen profit and 5,000 yen maximum drawdown.

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

Of course there is risk involved, but leverage is a mechanism to "allow larger position sizes with a small amount of capital."

However, as the lot size expands, the expected loss increases as well.

If you treat the initially decided 2,000 yen as your acceptable loss, you can set a rule like "keep it to 0.04 lots."

In that case, whether you use 4x leverage or 25x leverage becomes irrelevant.

(Note that margin maintenance rate will change, so with 4x leverage there is a higher risk of a stop-out; please be aware of that.)

Understanding this, you will realize that leverage is not scary; what is scary is overextending your lot size.

What remains then is a rational, cold business decision to "limit risk while maximizing return."

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

Generally, assume 25x leverage and adjust the lot size so that the potential loss remains within 2-4% of your assets for clarity.

(Of course, if your aim is to operate at a high-interest, low-leverage approach, 1-3x may be the correct range.)

If errors occur with leverage, the issue is not leverage itself.

The problems are greed to "make money quickly," the fear of locking in losses, and the lack of planning in trades.

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

If the expected value of a trade is positive, profits will gradually surpass losses as you continue.

Fear correctly, use it correctly. Beyond that, a future where you can achieve things starting from a small amount awaits.