What Is a Good Leverage Ratio for Intraday Trading? (Examples for Beginners)
Most brokers in India typically offer 4-5x Leverage in Intraday trading, based on various factors, including market volatility.
If you are a trader, I am sure you’d have heard the term “leverage”. It is the not-so-secret tool that can make a crorepati or bankrupt you.
Like every double-edged sword, intelligent investors use it for 10x returns, while dumb investors use it to lose all their money. As a seasoned investor, I will teach what leverage is. and what a good leverage ratio really looks like. You’ll learn everything in the context of the Indian intraday trading ecosystem (think Zerodha, Angel One, Dhan, Upstox, etc.).
So, what is Leverage?
Leverage is basically trading with more money than you actually have by borrowing from the broker.
If you invest Rs. 100 in your account, you can directly make investments worth Rs. 100,
But wait – If the broker gives me 10x leverage, you can use Rs. 100 to make investments worth Rs. 1000 instead.
What’s a Good Leverage?
Well, in an ideal world, you’ll like an outrageous leverage like 100x. But that’s now how brokers work in India.
Industry standard is anywhere between 3x-5x leverage.
What’s The Catch?
Must you be wondering, Is higher leverage good or bad?
In my above example, you must have noticed that when you get 10x leverage, you can have Rs. 100 in your account, but still make investments worth Rs. 1000
A Word of Caution!
As an investor, I myself have seen leverage as high as 10x-15x in my life. I’d strongly avoid that. Higher leverage means losses are also higher. (But these high leverages are not seen now, due to stricter rules from SEBI)
High leverage puts you in a tough spot if markets move against you. When I tried investing at 10x, it felt like free profit fuel”. What actually happened?
- Emotionally, I became desperate to “recover.”
- One bad trade wiped out my entire day’s profit
- Stop losses got hit too quickly
How to Use Leverage?
Well, to use leverage, you’d have to have a trading account and knowledge of the market. Proper analysis of the investment is critical before making any investment. For my trading, I use Zerodha, as it’s India’s largest trading platform. They are a discount broker, so their overall fees and charges are the lowest in the industry. Sign up for Zerodha today for FREE!
The robust API, charts, and trading indicators are perfect for my analysis of stocks. Coupled with API and Algorithmic Trading capabilities, I am able to execute orders at the perfect time for the best results possible.
Examples of Leverage
Now, I am not going to bore you with theory. As promised, I will be showing you examples to better
Example 1
- Capital: Rs. 5,000
- Leverage Used: 3x
- Total Position Size: ₹15,000
Let’s say the market moves 10% up with your leveraged position, you’d profit 10/100 x 15000 = Rs. 1500 profit.
The leverage gives you greater profits.
But let’s see what happens when the leverage gets too high.
Example 2
- Capital: Rs. 5,000
- Leverage Used: 10x
- Total Position Size: Rs. 10,000
In this example, the market has moved down 10%, and now your losses amount to 10/100*50000 = Rs. 5000
Here, you lose all your capital, with just 10% movement in the market.
That’s why it is never suitable to have high leverage, as the smallest market movement can cause massive issues.
SEBI’s rules
After SEBI’s updated margin rules:
- Index Futures/Options: Typically 1x to 5x depending on volatility
- Equity Intraday (MIS/CNC): Mostly 3x to 5x across brokers
- Some brokers occasionally give up to 10x on highly liquid stocks
But SEBI rules ensure no broker can go back to the super-high 30x–40x leverage days.
Expert Opinion
This is not financial advice, but I will be sharing my own decision-making process that might help you in your decision-making. Generally, if I am not sure about market conditions (situation is volatile), I’d use up to 2-3x margin (or skip the trade right away, LOL!). If things look reasonable, I’ll go up to 5x. It’s rare for me to go anywhere above that.
Also, look for a broker with minimum charges, brokerage, and fees. Discount brokers are always better suited to the needs of power traders like you.
