Leverage is a ratio that lets you control a larger position with a smaller amount of capital. For example, with 100:1 leverage, you can trade a $100,000 position by depositing $1,000 in margin.
How leverage works
When you open a leveraged position, you deposit a percentage of the full position size called margin. Your broker lends you the rest. You keep any profits or losses on the entire position, not just your margin.
Amplified gains and losses
A 2% price move in your favour earns 2% on the full $100,000 position, not just $1,000. But it cuts both ways: a 2% move against you wipes out 200% of your margin. When your margin balance falls below a threshold, your broker issues a margin call—demanding you add funds—or automatically closes positions at market prices.
Why traders use leverage
Leverage lets traders profit from small price movements without deploying large capital. A 1% move in a forex pair is common; with leverage, it represents significant money. This makes it useful for capitalizing on normal market volatility.
Using leverage wisely
High leverage is riskier for inexperienced traders because volatility can trigger margin calls quickly. Lower leverage (10:1 or 20:1) gives more breathing room during normal market swings. Essential tools include stop-loss orders, proper position sizing, and a plan to limit risk per trade.
