What Is Leverage in Trading?

Leverage allows a trader to control a market position larger than the amount of capital required as margin to open it.

Leverage is commonly expressed as a ratio.

Examples include:

The leverage available depends on factors such as the product, account, provider and applicable regulatory requirements.

Suppose a trader wants exposure to a position worth:

$10,000

If the applicable leverage is:

1:10

the simplified margin requirement would be:

$10,000 ÷ 10 = $1,000

The trader therefore commits $1,000 of margin while controlling $10,000 of market exposure.

No.

Leverage does not make the underlying market move more.

Instead, it increases the amount of market exposure relative to the trader's capital.

If the $10,000 position moves by 1%, the change in position value is:

$100

Compared with the $1,000 margin committed, that $100 represents a much larger percentage.

This is extremely important.

Leverage can magnify:

Potential gains

and

Potential losses

A trader should therefore never judge a trade only by how little margin is required to open it.

The important figure is the total market exposure.

A smaller margin requirement can make a large position easier to open.

It does not make the position safer.

In fact, using more exposure relative to available capital generally increases sensitivity to market movements.

Leverage allows greater market exposure using a smaller margin amount.
Leverage is expressed as a ratio.
Margin and exposure are not the same thing.
Profit and loss are based on the position exposure, not simply the margin committed.
Leverage magnifies both potential gains and losses.