Why leverage ruins the result even when the forecast is right

Leverage is described as an amplifier of results. It also amplifies something else — the probability of being knocked out.

The arithmetic of a drawdown

An unleveraged position lives through a fall and recovers with the market. A leveraged one can be closed by force on the same fall, and the recovery happens without you.

{{figure:drawdown|caption=A drawdown becomes a loss only at the moment of exit — and with leverage the moment of exit is not yours to choose}}

Recovery asymmetry

Coming back after a fall requires a rise larger than the fall: losing half demands doubling. Leverage deepens the fall and therefore raises the required recovery disproportionately.

The cost of time

Borrowed money is paid for daily. A position that is "simply waiting" slowly loses return — unlike ordinary ownership of a security.

Where leverage is justified

In short operations with strict risk management, and for those who do it professionally. For an investor with a horizon in years the mechanism contradicts the very idea of the approach.

Hidden leverage

It is not always explicit. A futures contract carries it by construction — Initial margin: why a position can be closed without you. So does a portfolio assembled with borrowed money in another form.

Related: Short positions and leverage: why risk here works differently and Drawdowns: why duration matters more than depth.