What is Leverage?

Leverage allows a trader to control a position larger than their deposited capital by borrowing the difference from a broker or exchange. It is expressed as a ratio — for example, 10:1 leverage means that for every $1 of the trader’s own funds, they can control $10 worth of a position.

How leverage works in practice:

• A trader deposits $1,000 as margin and uses 10:1 leverage to open a $10,000 position.
• If the asset rises 5%, the position gains $500 — a 50% return on the $1,000 deposited.
• If the asset falls 5%, the position loses $500 — a 50% loss on the deposited capital.
• If the asset falls 10%, the position loses $1,000 — wiping out the entire margin deposit, triggering a liquidation.

Liquidation occurs when losses reduce the margin balance below the exchange’s required minimum. At that point, the exchange automatically closes the position to prevent the loss from exceeding the deposited funds.

Leverage is common in:

• Forex trading, where brokers often offer high leverage ratios
• Cryptocurrency derivatives markets (futures and perpetual contracts)
• Traditional futures and options markets

In crypto markets, some platforms have offered leverage ratios of 50:1, 100:1, or higher. Regulators in many jurisdictions have imposed caps on leverage available to retail traders due to the associated risk of rapid, total loss of deposited funds.

Leverage amplifies volatility’s effect on a position. An asset that moves modestly in percentage terms can produce outsized gains or losses for a leveraged trader. Risk management — including position sizing and stop-loss orders — is particularly critical when using leverage.