Education · Guide
What is leverage in trading?
How leverage and margin work, why they magnify both gains and losses, and how to keep the risk under control.
What is leverage in trading?
Leverage lets you open a position that is larger than the money you put up. You deposit a fraction of the position's value as margin, and the broker's platform lets you trade the full amount. It increases how much a given price move is worth to you.
The market moves the same way either way. Leverage sets the size of your exposure. A trader using leverage earns more from a favourable move and loses more from an adverse one, for the same amount of capital.
What is the difference between leverage ratio and margin percentage?
Leverage ratio and margin percentage describe the same thing from opposite sides. A ratio of 20:1 means you can hold a position worth up to 20 times your margin. The margin requirement is 1 divided by 20, or 5% of the position value.
Divide 100 by the ratio to get the margin percentage (100 / 20 = 5%), or divide 100 by the margin percentage to get the ratio.
| Leverage ratio | Margin required | Margin for a $10,000 position |
|---|---|---|
| 10:1 | 10% | $1,000 |
| 20:1 | 5% | $500 |
| 50:1 | 2% | $200 |
| 100:1 | 1% | $100 |
The ratios in this table are for illustration only. The leverage available to you depends on the instrument and your account, so check the terms before you trade. You can test different figures with the margin calculator.
How does leverage magnify gains and losses?
Leverage multiplies both gains and losses relative to the capital you commit. The price move is the same either way. What changes is the size of the position it applies to.
Hypothetical example: You want to buy a $10,000 position. With no leverage you would put up the full $10,000. With 20:1 leverage you put up $500 of margin. The price rises 2%. The position gains $200. That is 2% of the unlevered capital, but 40% of your $500 margin.
Now the price falls 2% instead. The position loses $200, which is again 40% of your margin. A 5% fall would lose $500, all of the margin. A fall larger than 5% would lose more than your margin, and the extra comes out of the rest of your balance. If the market gaps past your stop-out, the loss can exceed your whole deposit.
| Price move | Profit or loss on $10,000 | Return on $500 margin |
|---|---|---|
| +1% | +$100 | +20% |
| +2% | +$200 | +40% |
| -2% | -$200 | -40% |
| -5% | -$500 | -100% |
A small deposit that controls a large position can lose most of its value on a modest price move.
What is a margin call?
A margin call is a warning that your account equity has fallen close to the margin your open positions require. Equity is your balance plus or minus your open profit and loss. When it drops too far, the platform or broker may tell you to deposit funds or close positions.
Platforms often show a margin level: equity divided by used margin, as a percentage. A falling margin level means you have less room before a margin call. The exact trigger differs between brokers and accounts, so find it in the account terms before you trade.
What is a stop-out?
A stop-out is the automatic closing of your positions when your margin level falls below a set threshold. It exists to stop losses growing further than your equity can cover. Positions are usually closed starting with the largest loser, until the margin level recovers.
A stop-out reduces risk but does not remove it. In a fast market, or when prices gap over a weekend or news event, positions can close at worse prices than expected. Losses may then exceed the money in your account. The stop-out level is set by the platform's terms, so check the rules for your account.
How do you manage leverage risk?
You manage leverage risk by controlling position size, not by chasing the highest ratio. The leverage available is a ceiling. How much you use is your choice.
- ✓ Size by risk. Decide the amount you can lose on one trade, often 1% to 2% of the account, then size the position from your stop-loss distance. The position size calculator helps.
- ✓ Use stop-losses. Set an exit before you enter. Remember it can fill at a worse price in fast markets.
- ✓ Keep spare margin. Hold a large buffer of free margin so a normal move does not trigger a margin call.
- ✓ Limit total exposure. Several positions on correlated pairs can act like one big position.
- ✓ Be careful around events. Spreads widen and prices jump during major news.
- ✓ Practise first. Use a demo account to see how leverage feels before using real money.
For more background, read forex trading for beginners, what is a CFD and the glossary.
Risk note. CFDs are leveraged products. Prices can move quickly against you, and losses can exceed your deposit. This guide is general education, not personal advice. Read the Risk Disclosure before you trade.
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