Traders Union research: Traders overestimate their understanding of leverage
Many retail traders are confident that they understand how leverage works, but in practice their knowledge is significantly weaker. Traders Union research revealed a noticeable gap between traders’ self-assessment and their actual understanding of how leverage affects position size, margin and potential losses.
In the study “Do Retail Traders Understand Leverage?”, Traders Union analysts found that around 58% of participants rated their understanding of leverage as high or very high. However, only 34% demonstrated a high level of objective knowledge, correctly answering at least five out of six questions.
Most participants understand the basic principle of leverage relatively well. For example, 71% correctly identified that $1,000 in margin with 1:20 leverage allows a trader to control a $20,000 position.
However, the results were significantly weaker when it came to calculating potential losses. Only 46% correctly determined that a 3% decline in such a position would result in a $600 loss.
Leverage is often confused with position size
Another problem identified by the research was the relationship between leverage and position size. Only 41% of traders understand that when the position size and price movement are the same, the monetary profit or loss does not depend on the leverage ratio.
At the same time, 43% incorrectly believe that using 1:20 leverage instead of 1:10 automatically results in a larger profit or loss.
Leverage itself does not change the financial result when the position size remains the same. It determines the amount of margin required and allows traders to control a larger position with the same amount of capital.
The higher the leverage, the weaker the knowledge
Traders Union data shows that using higher leverage is not associated with a better understanding of how it works. On the contrary, knowledge levels gradually decline as the typical leverage ratio increases.
Among traders using leverage of 1:10 or lower, 42% demonstrated a high level of knowledge. In the group using leverage above 1:50, this figure fell to 28%. Confidence, however, moved in the opposite direction: 64% of traders using leverage above 1:50 rated their knowledge as high or very high.
Overall, 42% of respondents typically use leverage of 1:20 or lower, while 37% use leverage above 1:20. Another 14% said their leverage varies substantially depending on the trade, while 7% could not identify the level they usually use.
Experience improves understanding of leverage
The research found that longer trading experience is associated with a better understanding of leverage. Traders with several years of experience generally have a stronger grasp of how leverage affects margin, position size and potential losses than participants with less than one year of experience.
However, even extensive trading experience does not eliminate knowledge gaps completely. According to Traders Union, regularly using leverage does not by itself guarantee a full understanding of the risks involved.
Earlier Traders Union research found that trading signals influence the decisions of nearly half of traders.
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