Why Trading with Leverage is Risky

Trading with leverage allows traders to control larger positions than their capital would otherwise permit. While this can amplify profits, it can also magnify losses, making leverage a double-edged sword. In this article, we explore why leverage is risky and use Python to simulate its effects using the OANDA API.

What Is Leverage?

Leverage is the use of borrowed capital to increase the potential return of an investment. For example, using 50:1 leverage, a trader with $1,000 can control a $50,000 position.

\text{Leverage} = \text{Total Position Size} / \text{Margin}

The Risk of Amplified Losses

Leverage increases your exposure, not your accuracy. A small adverse move in the market can wipe out your capital. For instance, a 2% market move against you on 50:1 leverage could mean a 100% loss of your margin.

Let's use Python to demonstrate this.

Setup: Required Libraries

import oandapyV20
import oandapyV20.endpoints.pricing as pricing
import pandas as pd

Fetching Price Data from OANDA

account_id = "YOUR_ACCOUNT_ID"
access_token = "YOUR_OANDA_API_KEY"

client = oandapyV20.API(access_token=access_token)

# Get the latest price of EUR/USD
params = {"instruments": "EUR_USD"}
r = pricing.PricingInfo(accountID=account_id, params=params)
client.request(r)

price = float(r.response['prices'][0]['bids'][0]['price'])
print(f"Current EUR/USD price: {price}")

Simulating a Leveraged Trade

# User capital and leverage
capital = 1000  # USD
leverage = 50

# Position size (with leverage)
position_size = capital * leverage  # $50,000

# Simulate a 1% move against the trade
loss_percent = 0.01
loss = position_size * loss_percent  # $500 loss

remaining_capital = capital - loss
print(f"After a 1% move against you, remaining capital: ${remaining_capital:.2f}")

📉 As you can see, a 1% price movement against a $50,000 position wipes out half of your $1,000 capital.

Real-World Consequences

Margin Calls: If your losses approach your margin, your broker may liquidate your positions.
Emotional Trading: Higher stakes can trigger poor decision-making.
Volatility Sensitivity: Even normal market fluctuations become dangerous.

Safer Alternatives

Use lower leverage (e.g. 5:1 or 10:1).
Always set stop-loss orders.
Only risk 1-2% of your capital on a single trade.
Combine leverage with solid risk management strategies.

Conclusion

Leverage is a powerful tool—but with great power comes great risk. While it can multiply profits, it just as easily multiplies losses, often leading to rapid account depletion. Trade wisely, and always respect the leverage.