Do Traders Understand Leverage?

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TU Research of 1,250 retail traders reveals a substantial gap between confidence in leverage and demonstrated understanding. 58% describe their leverage knowledge as high or very high, while only 34% demonstrate high objective knowledge of leverage. Although 71% understand the market exposure created by 1:20 leverage, only 46% correctly determine the loss caused by a 3% adverse market movement on the same leveraged position. Traders typically using leverage above 1:50 average 3.4 correct answers out of six, compared with 4.2 among traders using 1:10 or less. The findings suggest that experience using leverage does not necessarily correspond to a complete understanding of how leverage affects exposure, margin and trading losses.

Leverage allows retail traders to control a larger market position with a smaller amount of capital committed as margin. While the concept seems straightforward, knowing that leverage increases risk is not the same as understanding how it affects exposure, margin requirements and potential losses.

This distinction matters because leveraged products are widely used in Forex and CFD trading, while regulators impose leverage limits and other protections to reduce risks for retail clients.

But do traders actually understand the leverage they use? To find out, we surveyed 1,250 retail traders, comparing their leverage use and self-assessed knowledge with their ability to answer practical questions about leverage, margin and losses.

The research aims to answer key questions:

What leverage do retail traders actually use?
How well do traders think they understand leverage?
Do traders understand how leverage changes market exposure?
Can traders correctly estimate losses on leveraged positions?
Do traders understand the relationship between leverage, margin and position size?
Do traders know as much about leverage as they think they do?
Do traders who use more leverage understand it better?
Does trading experience improve leverage knowledge?

Findings

Based on TU Research, several important patterns emerge regarding how retail traders understand and use leverage.

A substantial minority regularly use relatively high leverage. 42% typically use leverage of 1:20 or lower, while 37% normally trade above 1:20. Another 14% say their leverage varies substantially by trade, and 7% cannot identify the leverage they normally use.
Traders are considerably more confident about leverage than objective testing suggests. 58% rate their understanding as high or very high, while only 34% demonstrate high objective leverage knowledge.
Basic leverage mechanics are better understood than their implications for losses. 71% correctly identify the market exposure created by 1:20 leverage, but only 46% correctly calculate the loss caused by a 3% adverse movement on the leveraged position.
Many traders do not clearly separate leverage from position size. Only 41% correctly recognize that two identical-sized positions experience the same monetary profit or loss from the same price movement even when different leverage ratios are used.
Higher leverage use does not correspond to stronger knowledge. Traders typically using leverage above 1:50 average 3.4 correct answers out of six, compared with 4.2 among those using 1:10 or less.
Confidence rises as leverage use increases even though objective knowledge declines. 64% of traders typically using leverage above 1:50 describe their understanding as high or very high, while only 28% achieve a high objective knowledge score.
Experience is associated with stronger understanding, but does not eliminate knowledge gaps. Traders with more than five years of leveraged-trading experience average approximately 4.3 correct answers, compared with 3.3 among traders with less than one year of experience.

Risk warning: Forex trading carries high risks, with potential losses including your entire deposit. Market fluctuations, economic instability, and geopolitical factors impact outcomes. Studies show that 70-80% of traders lose money. Consult a financial advisor before trading.

Institutional validation

Institutional research consistently identifies leverage as one of the central risks associated with retail CFD and Forex trading. Regulators in several major markets have introduced specific restrictions because leverage allows relatively small amounts of capital to create much larger market exposure.

The European Securities and Markets Authority (ESMA) introduced EU-wide product intervention measures for CFDs after identifying significant investor-protection concerns. According to ESMA's analysis of CFD product intervention measures, analysis conducted by national competent authorities found that 74–89% of retail CFD accounts typically lost money, with average losses per investor ranging from approximately €1,600 to €29,000.

ESMA identified excessive leverage among the characteristics contributing to the investor-protection concern. Its 2018 CFD product intervention decision established leverage limits according to the volatility of the underlying asset:

1:30 for major currency pairs;
1:20 for non-major currency pairs, gold and major equity indices;
1:10 for commodities other than gold and non-major equity indices;
1:5 for individual equities and other reference values;
1:2 for cryptocurrencies.

The intervention also introduced a margin close-out rule at 50% of minimum required margin, negative balance protection, restrictions on incentives to trade and standardized risk warnings showing the percentage of a provider's retail CFD accounts that lose money.

The structure of these limits illustrates an important characteristic of leverage risk. Maximum permitted leverage decreases as the underlying asset is treated as more volatile. The regulatory framework therefore does not treat leverage independently from the characteristics of the market being traded.

The Financial Conduct Authority subsequently made comparable restrictions permanent in the United Kingdom. Under the FCA's Policy Statement PS19/18 on CFDs sold to retail clients, firms must generally limit retail CFD leverage between 1:30 and 1:2, depending on the underlying asset.

The FCA framework also requires firms to close positions when funds in a client's CFD account fall to 50% of the margin required to maintain open positions. Retail clients must receive negative balance protection preventing them from losing more than the funds in their CFD account, while providers must display standardized warnings showing the percentage of their retail accounts that lose money.

These measures were explicitly designed to reduce consumer harm. When confirming the permanent rules, the FCA stated that the restrictions were intended to address harm associated with retail CFD trading and permanently incorporate protections previously introduced by ESMA.

More recent evidence shows that leveraged retail trading continues to produce substantial losses. In January 2026, the Australian Securities and Investments Commission published the results of a sector-wide review of CFD issuers.

According to ASIC's Report 828 and accompanying findings, 68% of Australian retail CFD investors lost money during the 2024 financial year. Their combined losses exceeded AUD 458 million, including AUD 73 million in fees.

ASIC describes CFDs as complex leveraged products and notes that leverage can magnify investor losses. A relatively small adverse movement in the underlying market can therefore have a much larger financial effect relative to the capital committed to a leveraged position.

However, evidence from investor-literacy research suggests that actually using margin does not necessarily mean that an investor understands it.

The FINRA Investor Education Foundation's Investors in the United States: The Changing Landscape examined objective investment knowledge using questions covering stocks, bonds, risk, short selling, margin and other investment concepts.

The margin question asked investors to evaluate what happens when $500 is used to purchase $1,000 of stock on margin and the stock subsequently falls by 50%.

Only 23% of investors answered the buying-on-margin question correctly in 2021. 51% selected an incorrect answer and another 24% said they did not know. Margin was one of the weakest areas of knowledge measured by the survey, alongside short selling.

This evidence provides an important institutional basis for examining leverage literacy separately from trading participation.

However, these studies leave a narrower question largely unanswered: do retail traders who actively use leverage understand how it changes their exposure, margin requirements and potential losses? The TU research addresses this gap by comparing traders' actual leverage use with both subjective confidence and objective understanding.

Theoretical research

Understanding leverage requires more than recognizing the term. It involves connecting position value, margin, leverage ratio and price movements within the same trading decision.

At its simplest, leverage describes the relationship between the capital required as margin and the total market exposure controlled by the trader.

With leverage of 1:20, for example, $1,000 of required margin can support $20,000 of market exposure. A trader controlling that position is therefore exposed to price changes on $20,000 rather than only the $1,000 committed as margin.

This distinction creates a potential problem in risk perception. Market movements are normally expressed as percentages of the underlying position, while traders may psychologically evaluate the result relative to the much smaller amount of margin committed.

For example, a 1% adverse movement on a $20,000 position represents a $200 change in position value. Relative to the $20,000 position this remains a 1% market movement, but $200 represents 20% of the $1,000 initially committed as margin.

Understanding leverage therefore partly depends on financial numeracy. Knowing that leverage can magnify gains and losses does not necessarily mean that a trader can translate a leverage ratio and percentage market movement into an actual monetary outcome.

Another important distinction is between leverage and position size.

Suppose two traders both open a $10,000 EUR/USD position. One uses leverage of 1:10 and the other 1:20. If the positions are otherwise identical, the same price movement produces the same monetary profit or loss on the $10,000 exposure. What changes is the margin required to support that exposure. At 1:10, a $10,000 position requires approximately $1,000 of margin. At 1:20, the same position requires approximately $500.

Higher leverage therefore does not automatically increase the loss on an unchanged position. Instead, it allows a trader to obtain the same exposure using less margin – or, if the additional buying power is used, to create a larger position from the same amount of capital.

This distinction may contribute to misunderstanding because trading platforms normally calculate margin, free margin, equity and unrealized profit or loss automatically. A trader can therefore use leverage repeatedly without independently calculating the underlying relationship.

A further relevant mechanism is overconfidence. Repeated trading experience can increase familiarity with leveraged products, but familiarity does not necessarily produce equivalent objective understanding.

This makes it useful to distinguish between subjective leverage knowledge and objective leverage knowledge.

Survey data

To understand how well retail traders understand leverage, we conducted a proprietary quantitative study examining leverage use, subjective knowledge, objective understanding and trading experience.

While institutional research primarily documents CFD losses, product risks and regulatory protections, this study focuses specifically on leverage literacy.

Methodology

The study was conducted using a structured online survey based on the CAWI methodology.

Sample composition: 1,250 retail traders.
Coverage: North America, Europe, Asia, Latin America, Africa, and the Middle East.
Age: 18–60 years old.
Participation criteria: respondents who independently traded at least one leveraged financial product during the past three years, including leveraged Forex, CFDs, margin trading or comparable leveraged derivatives.
Statistical confidence: 95%.
Estimated sampling deviation: ±2.8%.

Only respondents with previous real-money leveraged-trading experience were included in the principal sample.

Research team

The study was conducted by our experts:

Anastasiia Chabaniuk (Author, TU Research) – research design and interpretation.
Chinmay Soni (Fact-checker) – data validation and statistical verification.
Ciaran Ryan (Editor-in-Chief) – editorial and methodological supervision.
TU Research Team (Andrey Mastykin, Oleg Tkachenko) – data collection and analysis.

What leverage do retail traders actually use?

Respondents were first asked what level of leverage they most commonly use. The question referred to leverage actually used rather than the maximum available from their broker.

Leverage typically used by retail traders
Typical leverage	Share of traders
Less than 1:5	8%
1:5–1:10	14%
More than 1:10–1:20	20%
More than 1:20–1:30	17%
More than 1:30–1:50	11%
More than 1:50–1:100	6%
More than 1:100	3%
Varies substantially by trade	14%
Do not know	7%

Insight: 42% of surveyed traders normally use leverage of 1:20 or lower. However, 37% typically trade above 1:20, including 9% who normally use leverage above 1:50. Another 14% say their leverage varies substantially between trades. Notably, 7% of respondents with real-money leveraged-trading experience cannot identify approximately how much leverage they normally use.

How well do traders think they understand leverage?

Before completing the objective knowledge test, respondents were asked to rate their own understanding.

Self-assessed understanding of leverage:

Very high – 17%;
High – 41%;
Moderate – 31%;
Low – 9%;
Very low – 2%.

Insight: Most leveraged traders are confident in their understanding. 58% describe their leverage knowledge as high or very high, while only 11% consider their knowledge low or very low.

Do traders understand how leverage changes market exposure?

The first practical scenario tested the basic relationship between margin, leverage and market exposure.

Respondents were asked:

A trader uses $1,000 as margin to open a position using leverage of 1:20. What is the total market exposure of the position?

Understanding market exposure created by leverage
Answer	Share of traders
$1,000	7%
$5,000	8%
$20,000 – correct	71%
$21,000	8%
Don't know	6%

Insight: 71% correctly identify $20,000 as the market exposure created by $1,000 of margin at leverage of 1:20. However, 29% of respondents with real-money leveraged-trading experience cannot correctly apply this basic leverage relationship.

Can traders correctly estimate losses on leveraged positions?

The knowledge gap becomes substantially larger when leverage must be connected to an actual market movement.

Respondents were given the following scenario:

A trader uses $1,000 as margin for a $20,000 position. The market moves 3% against the position. Ignoring fees and assuming the position remains open, approximately how much has the position lost?

Understanding losses on leveraged exposure
Answer	Share of traders
$30	14%
$60	15%
$200	17%
$600 – correct	46%
Don't know	8%

Insight: Only 46% correctly calculate the $600 loss. This compares with 71% who correctly identify the original market exposure.

Do traders understand the relationship between leverage, margin and position size?

Respondents were then tested on a distinction that is often obscured by simplified explanations of leverage.

Two traders open the same $10,000 EUR/USD position at the same price and close it at the same price. Trader A uses leverage of 1:10 and Trader B uses 1:20. Ignoring financing costs, whose monetary profit or loss from the price movement is larger?

Understanding leverage versus position size
Answer	Share of traders
Trader A	8%
Trader B	43%
The profit or loss is the same – correct	41%
Depends only on account balance	5%
Don't know	3%

Insight: Only 41% correctly recognize that the monetary result is the same when position size and price movement are identical. 43% incorrectly believe that the trader using 1:20 leverage automatically experiences the larger profit or loss.

Do traders know as much about leverage as they think they do?

The practical questions were combined into an objective leverage knowledge score.

Objective leverage knowledge test results:

5–6 correct answers – 34%;
4 correct answers – 25%;
3 correct answers – 20%;
2 correct answers – 13%;
0–1 correct answers – 8%.

Insight: 34% of retail traders demonstrate high objective leverage knowledge by correctly answering at least five of six questions. Another 25% answer four correctly, while 41% answer no more than three questions correctly. This produces a substantial difference between perceived and demonstrated knowledge.

Objective knowledge by self-assessed leverage knowledge
Self-assessed knowledge	Average correct answers
Very high	4.5 / 6
High	4.0 / 6
Moderate	3.4 / 6
Low	2.7 / 6
Very low	2.2 / 6

Insight: Confidence is positively associated with actual understanding: traders who rate themselves more highly generally achieve better scores. However, confidence exceeds demonstrated mastery for a substantial part of the sample.

Do traders who use more leverage understand it better?

Objective knowledge scores were compared with the leverage respondents normally use.

Leverage knowledge by typical leverage used
Typical leverage	Average correct answers
1:5 or lower	4.3 / 6
More than 1:5–1:10	4.1 / 6
More than 1:10–1:20	4.0 / 6
More than 1:20–1:30	3.8 / 6
More than 1:30–1:50	3.6 / 6
Above 1:50	3.4 / 6

Insight: Higher leverage use does not correspond to stronger objective understanding. Instead, average knowledge scores gradually decline as typical leverage increases. Traders using leverage of 1:10 or less average approximately 4.2 correct answers, compared with 3.4 among traders normally using leverage above 1:50.

Confidence and knowledge by typical leverage
Typical leverage	High/very high self-rated knowledge	High objective knowledge
1:10 or lower	55%	42%
More than 1:10–1:20	56%	38%
More than 1:20–1:30	58%	34%
More than 1:30–1:50	61%	30%
Above 1:50	64%	28%

Insight: Confidence and objective understanding move in opposite directions as leverage rises. Among traders typically using leverage above 1:50, 64% describe their understanding as high or very high, while only 28% achieve a high objective knowledge score.

Does trading experience improve leverage knowledge?

The final analysis compared objective leverage knowledge with years of leveraged-trading experience.

Leverage knowledge by trading experience:

Less than 1 year – 3.3 / 6;
1–2 years – 3.6 / 6;
3–5 years – 4.0 / 6;
6–10 years – 4.3 / 6;
More than 10 years – 4.4 / 6.

Insight: More experienced traders demonstrate stronger objective leverage knowledge. Those with less than one year of experience average 3.3 correct answers, compared with 4.3 among respondents with six to ten years of leveraged-trading experience and 4.4 among those with more than ten years.

Download the full PDF version of the TU research to access additional analysis, detailed survey data, and extended findings from our analytical team. The report includes complete methodology, charts, and behavioral insights referenced throughout the study.

Download PDF version

Practical implications for retail traders

The findings suggest that leverage should be approached as a position-management tool rather than simply a way to increase trading capacity. For retail traders, this means building leverage decisions into the trade-planning process before a position is opened.

Set position size before choosing leverage. Decide how much market exposure the trade should have based on the trading plan and acceptable risk. Leverage can then determine how much margin is required to support that position, rather than determining how large the position becomes.
Run a loss scenario before entering the trade. Calculate the monetary result if the market moves against the position by a realistic amount. This shifts attention from the leverage ratio itself to the amount of capital actually at risk.
Check margin capacity beyond the initial requirement. Opening a position is only the first step. Traders should consider how an adverse price movement would affect available margin and whether other open positions could increase pressure on the account at the same time.
Use lower leverage when the calculation is unclear. If the relationship between position size, margin and potential loss cannot be explained in monetary terms before a trade, reducing exposure provides a more conservative starting point than relying on the broker's maximum available leverage.
Treat broker limits as technical limits, not risk recommendations. Maximum available leverage describes what an account is permitted to use. It does not determine an appropriate level for an individual trader, strategy or market condition.
Practice leverage scenarios away from live trading. Demo accounts, margin calculators and position-size calculators can be used to test how different position sizes and price movements affect margin and account equity without putting real capital at risk.

For trading education, the findings point to a similar priority. Leverage explanations should move beyond definitions such as "leverage magnifies gains and losses" and include practical scenarios in which traders calculate exposure, required margin and potential monetary losses themselves. The ability to perform these calculations may be more useful for day-to-day risk decisions than familiarity with leverage terminology alone.

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Data sources and methodology

European Securities and Markets Authority (ESMA). Additional information on the agreed product intervention measures relating to contracts for differences and binary options, 2018.
European Securities and Markets Authority (ESMA). ESMA adopts final product intervention measures on CFDs and binary options, 2018.
Financial Conduct Authority (FCA). PS19/18: Restricting contract for difference products sold to retail clients, 2019.
Financial Conduct Authority (FCA). FCA confirms permanent restrictions on the sale of CFDs and CFD-like options to retail consumers, 2019.
Australian Securities and Investments Commission (ASIC). ASIC secures nearly $40 million in refunds to investors and drives change after CFD sector falls short, 2026.
FINRA Investor Education Foundation. Investors in the United States: The Changing Landscape.
Traders Union. Best high leverage brokers.
IdSurvey. CAWI Methodology – Computer Assisted Web Interview.

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Conclusion

The key takeaway from this research is that most retail traders overestimate their understanding of leverage, which can have serious consequences for trading outcomes. While 58% of participants rate their leverage knowledge as high or very high, only 34% actually demonstrate high objective understanding in practical questions. For example, although 71% understand market exposure with 1:20 leverage, less than half can calculate losses from a 3% market move against them. True mastery of leverage goes beyond knowing the terminology and requires an ability to translate ratios into real monetary risks, making it essential for traders to incorporate hands-on calculations into their trading routine.

FAQs

How does overconfidence impact traders’ use of leverage?

The research shows that many traders are more confident in their leverage knowledge than their objective understanding justifies. Traders who use higher leverage tend to rate their knowledge as high, even though their actual understanding, as measured by practical questions, declines. This overconfidence may increase risk, as traders underestimate the complexities and potential losses involved.

Why is it important to distinguish between leverage and position size?

The article highlights that leverage and position size, though related, are not the same. Two traders with identical position sizes will have the same profit or loss for a given price movement, regardless of the leverage used. Leverage affects the margin required to open a position, not the monetary outcome of the trade. Misunderstanding this distinction can lead to poor risk management.

What regulatory protections exist to limit leverage-related risks for retail traders?

Regulators have introduced measures like leverage limits, margin close-out rules, negative balance protection, and standardized risk warnings to help reduce the risks of leveraged trading for retail clients. These protections are tailored based on the underlying asset's volatility and aim to prevent consumers from incurring losses greater than their deposited funds.

How can traders improve their understanding and use of leverage?

The findings suggest that traders can improve leverage use by calculating exposure, margin requirements, and potential losses before entering a trade. Practicing with demo accounts and tools such as margin calculators helps solidify these concepts. Setting position size based on risk tolerance, rather than relying on maximum available leverage, also leads to more responsible leverage use.

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Team that worked on the article

Anastasiia has 17 years of experience in finance and content marketing. She believes that the support of information and expert opinion is very important for the success of investors and new traders.

Learn about our editorial policies

Ciaran Ryan is a veteran financial journalist based in South Africa, where he covers cryptocurrency, mining, stock markets, and governance for Moneyweb. He also hosts the weekly Moneyweb Crypto Podcast.

Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data.

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