What Is Leverage in Trading?

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When I first started trading, I quickly realized that growing a small account was one of the biggest challenges. I had the skills and strategy, but my potential profits were limited without sufficient capital.

That’s when I discovered the power of leverage. Leverage allowed me to take larger positions than my account balance would typically permit, providing an opportunity to amplify my gains.​

Your goal is a hundred dollars a day. You’re trying to grow the account 10% each day. That’s the mindset I had starting out. Small daily wins — multiplied through leverage — add up fast when executed with discipline.

In this article, I want to share what leverage trading is, how it works, and how I’ve used it to grow my trading account. I’ll also discuss the risks involved and how to manage them effectively.​

What Is Leverage Trading?

Leverage trading involves using borrowed funds from your broker to increase the size of your trading position beyond what your own capital would allow.

How Leverage Works in Practice

Let’s say you have $1,000 in your account and your broker offers 4:1 leverage. That means you can take a position worth up to $4,000. You’re essentially borrowing $3,000 from your broker to make the trade.

The goal here is to amplify your returns. If the stock you buy moves up 10%, your $4,000 position gives you a $400 gain on just $1,000 of your own money. But there’s a flip side to that. If the stock moves down 10%, you’re now down $400, and that’s 40% of your original capital.

Why Brokers Offer Leverage

Brokers allow this because they’re confident they can protect themselves through margin requirements and forced liquidations. As a trader, it’s on you to manage the risk. Leverage is a powerful tool — but it’s a double-edged sword. You need to know exactly how to use it, or it can end your trading journey fast.

How Margin Accounts Work

Margin accounts are what make leverage possible — they allow you to borrow money from your broker to take larger positions than your cash balance alone would permit.

Cash vs. Margin Accounts

In a cash account, you can only trade with the money you’ve deposited. That means if you have $1,000 in cash, you can trade $1,000 worth of stock — no more.

But with a margin account, your broker gives you access to additional buying power. For example, if your broker offers 4:1 intraday leverage, that $1,000 now lets you trade $4,000 worth of stock. That extra $3,000 is essentially a short-term loan from the broker — one you don’t pay interest on if you close the trade the same day.

Understanding the PDT Rule

Here’s where it gets tricky — the Pattern Day Trader (PDT) rule. In the U.S., if you make four or more day trades within five business days, your account needs to be over $25,000, or your broker can restrict your trading.

That’s why a lot of beginner traders get confused. They open a margin account thinking they can trade freely, but once they hit the PDT threshold with less than $25K, they get locked out.

I’ve navigated this myself. That’s why I’m always strategic about how I use leverage under PDT rules. I focus on quality setups, make sure I’m not overtrading, and manage my risk tightly — especially when I’m working with a small account.

Why I Use Leverage: The Small Account Strategy

When I started with a small trading account, I needed a way to maximize my potential returns without waiting years to grow my capital. Leverage gave me the opportunity to trade setups that I wouldn’t have been able to afford otherwise.

Trading Bigger Than My Balance

Let’s say I spotted a clean setup on a stock priced at $3.50. I wanted to buy 1,000 shares — that’s a $3,500 position. But I only had $1,000 in my account. Leverage allowed me to borrow the remaining $2,500 from my broker to take the trade.

A thousand is your own money — the other $2,500, you’re basically borrowing from the broker. That simple math changed everything for me. It turned a limited account into a functional tool for scaling trades, without breaking PDT rules or waiting months to grow capital.

This approach helped me unlock trades that fit my strategy, even when I didn’t have the cash. The key, though, is knowing when it makes sense — and when it’s better to sit it out.

The Power of Position Sizing

Leverage also allowed me to size into trades more appropriately. Instead of trading one or two shares, I could trade in blocks of 500 or 1,000. That meant small price movements translated into meaningful gains — but only when I was on the right side of the trade.

Discipline First, Leverage Second

None of this works without discipline. I didn’t just hit “buy” because I could. Every trade was based on a setup I’d practiced and studied. Leverage wasn’t a shortcut — it was a tool I used after putting in the reps.

The Risks of Leverage (And How To Stay Safe)

There’s no sugarcoating it — leverage can hurt you just as fast as it can help you. If a trade turns against you, leverage makes that loss bigger and faster.

The Dark Side of Leverage

Let’s say you’re in a $4,000 position with just $1,000 of your own money. If the trade drops 5%, you’re down $200. That’s a 20% hit to your capital. One or two of those, and you’re playing defense — or worse, out of the game completely.

Margin Calls and Liquidation Risk

If your account drops too far, your broker might issue a margin call — basically demanding you add more money to stay in the trade. If you can’t? They’ll liquidate your position. It’s automatic, and it’s brutal if you weren’t prepared.

That’s why I treat leverage with serious respect. It’s not just about having a good setup — it’s about having a risk plan, too.

Smart Ways to Manage Leverage Risk

Here’s how I stay safe with leverage:

• Position sizing: I only risk a small percentage of my account on any trade. Leverage doesn’t change that.
• Stop-loss orders: Every trade I take has a defined risk level. If it hits, I’m out — no questions asked.
• Active monitoring: I don’t walk away from a leveraged trade. I’m at the screens and ready to act.

The takeaway? Use leverage only when you have the experience, the strategy, and the discipline to back it up.

Pattern Day Trader Rule and Leverage Access

The Pattern Day Trader (PDT) rule is a regulation that affects traders in the U.S. who execute four or more day trades within five business days. To comply with this rule, traders must maintain a minimum account balance of $25,000.​

If your account falls below this threshold, your broker may restrict your trading activity, limiting your ability to capitalize on short-term market opportunities.​

Leverage can help traders with smaller accounts navigate this rule by allowing them to take larger positions without exceeding the day trading limits. However, it’s essential to use leverage judiciously and understand the associated risks and regulatory requirements.​

For more information on day trading regulations, you can refer to the SEC’s guidelines on day trading.​

My Leverage Strategy Today

Leverage might’ve helped me grow a small account in the early days, but the way I use it now looks completely different. It’s all about strategy, not speed.

Strategic, Not Automatic

Over the years, my approach to leverage has evolved. I no longer use leverage indiscriminately — I use it as a strategic tool, only when market conditions align with my trading plan.

I assess each trade individually. I look at the volatility, volume, and strength of the setup before deciding whether to step in with size. If the market feels choppy or the setups aren’t clean, I’ll scale back and trade with just my own capital — no hesitation.

There are days when I don’t use leverage at all. And there are days when the momentum is strong, and I’ll lean in and use more of what’s available to me. The key is flexibility and discipline.

You’ve Got To Earn That Risk

One thing I always remind traders: just because you have access to leverage, doesn’t mean you should use it every time.

Just because your broker lets you trade with leverage doesn’t mean you should — you’ve got to earn that risk. That line has stuck with me for years. Leverage isn’t a reward — it’s a responsibility. You use it when your setup is strong, your mindset is sharp, and your risk management is already in place.

Refined With Experience

A solid setup and high probability trade — that’s when I’ll consider stepping up with size. But even then, my stop losses are tight, and my risk is calculated.

Ultimately, my leverage strategy today is more refined than when I started. I’ve made mistakes. I’ve learned from the account blowups. And now I know — restraint is just as powerful as aggression when you’re trading with borrowed money.

Conclusion

Leverage trading can be a game-changer, especially when you’re starting out with a small account. It gives you the power to take trades that might otherwise be out of reach. But it’s a double-edged sword — what helps you grow can also cut deep if you’re not careful.

So, what is leverage trading? It’s using borrowed money from your broker to take larger positions. It’s a tool — not a shortcut. And like any tool, it can be dangerous in the wrong hands or incredibly effective when used with skill.

If you’re just getting started or trying to grow a small account, make sure you’re focusing on your strategy first. Learn the patterns, respect the risk, and build your confidence — then leverage becomes your ally, not your downfall.

Want to see how I’ve used leverage to build a trading career — and how you can, too? Check out my Small Account Challenge, where I show you everything step by step.