Leverage allows you to gain larger exposure to the market using a relatively small amount of capital. It’s a tool that magnifies both potential profits and potential losses.
When you trade with leverage, you’re essentially borrowing money from your broker to open a larger position than you could with just your own funds.
How it Works
Leverage is often expressed as a ratio – for example, 10:1. This means for every $1 you deposit, you can control $10 worth of a trade.
Example: If you have $1,000 in your account and use 10:1 leverage, you can open a position worth $10,000. A 1% move in your favour would yield a $100 gain – but a 1% move against you would cause a $100 loss.
The Benefits
- 📈 Increased Market Exposure: Control larger positions with less capital
- 🔄 More Efficient Use of Funds: Keep capital available for other opportunities
- ⚡ Potential for Higher Returns: Magnified profits when the market moves in your favour
The Risks
- ⚠️ Amplified Losses: Market moves against you also result in larger losses
- 💥 Margin Calls: You may be required to deposit more funds to keep positions open
- 📉 Rapid Position Closure: Your broker can close positions if losses exceed your available margin
Leverage should be used with proper risk management – including stop-losses and position sizing – to avoid losing more than you can afford.
Key Considerations Before use
- 🧠 Understand how much capital you’re putting at risk
- 🧮 Calculate your effective leverage ratio
- 🔐 Use protective stops to manage downside risk
- 📊 Monitor your account and margin levels regularly
Quick Recap
- ✅ Leverage magnifies both gains and losses
- ✅ You trade with borrowed capital from your broker
- ✅ Risk management is critical
- ✅ Always know your effective exposure
Interactive Tip 💡
Try adjusting the leverage setting in a demo trading platform. Place trades at different ratios (e.g., 2:1 vs. 10:1) and monitor the results when the market moves just 1% in either direction.
Next up: Lesson 6 – Margin Calls