TRADING GLOSSARY

Leverage in trading: amplifier of profits and losses

Leverage allows you to control a larger position than your actual capital would normally permit. If a broker offers 10:1 leverage, you can control $10,000 worth of assets with just $1,000 of your own money. The remaining $9,000 is borrowed from the broker.

How leverage works

Different markets offer different leverage levels. Stock brokers typically offer 2:1 to 4:1 leverage for retail traders. Forex brokers offer 30:1 to 500:1 depending on regulation. CFD brokers offer 5:1 to 30:1. Futures markets have built-in leverage that can exceed 20:1.

The amount of your own money required to open a leveraged position is called the margin. At 10:1 leverage, the margin requirement is 10% — you need $1,000 to control $10,000. If the position moves against you enough that your account equity falls below the maintenance margin (typically 50% of the initial margin), you receive a margin call and must deposit more funds or have your position liquidated.

The double-edged sword

Leverage amplifies everything. If you use 10:1 leverage and the asset moves 1% in your favor, you make 10% on your capital. But if it moves 1% against you, you lose 10%. At 100:1 leverage (common in forex), a mere 1% adverse move wipes out your entire position.

This is why risk management is non-negotiable when using leverage. A trader with 50:1 leverage and no stop loss can lose their entire account in minutes during a volatile market move. AskTrade’s Risk Assessment Agent always factors in leverage when calculating recommended position sizes and stop loss distances.

Key leverage concepts

Margin requirement: The percentage of the total position value you must provide. Margin call: A demand from your broker to deposit more funds when your losses approach your margin. Liquidation: Forced closure of your position when you cannot meet a margin call. Effective leverage: The actual ratio of your position value to your account equity, which changes as the trade moves.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.