Leverage lets you control a large position with a small deposit, called margin. At 10 to 1, $1,000 of margin holds a $10,000 position, and every gain and loss is counted on the full $10,000. It makes small moves matter more in both directions, which is why it gets blamed for blown accounts it didn't cause on its own.
What is leverage in trading?
Your broker lends you the difference between your margin and the full size of the position. Your profit and loss follow the full position, not the deposit. A 5% move on that $10,000 position is $500 either way, which is half of your $1,000 margin.
Does leverage increase your risk?
Not by itself, and this is the part most people get wrong. Your risk on a trade is the distance to your stop loss times the size of the position. If you pick that size with position sizing, so a loss costs your chosen risk per trade, then 10 to 1 and 100 to 1 leverage give you the same loss on the same trade. What changes is how much cash the position ties up and how close a margin call sits. Leverage becomes dangerous when it tempts you to hold more than your risk budget allows, or when there's no stop at all... so long story short: put a SL on every trade and respect your risk management and you're good to go.
How far can price move before your margin is gone?
Without a stop, not far:
| Leverage | Move against you that uses up the whole margin |
|---|---|
| 10 to 1 | 10% |
| 30 to 1 | about 3.3% |
| 100 to 1 | 1% |
| 500 to 1 | 0.2% |
At 100 to 1, an ordinary day in a quiet market is enough to take the whole deposit. That's the table people think of when they say leverage is risky, and it only applies to positions sized off the margin instead of off the stop.
What is a margin call?
When your losses eat into the margin your broker requires, it either asks you to add funds or closes positions for you. Closing for you happens fast and rarely at a good price, and in a gap it can close it past your stop, which is slippage at the worst moment. Some accounts can even end below zero, depending on your broker and whether it offers negative balance protection.
The good use for it
Leverage is a way to free up cash, not a way to make more per trade. Traders who size from the stop usually run high leverage and low risk at the same time. Traders who size from what the broker allows run high leverage and high risk, and we all know how it ends.
Frequently asked questions
Related terms
- R Multiple — Every trade measured against what you risked, where a full stop is always minus 1R.
- Slippage — The gap between the price you expected and the price you actually got.
- Trading Costs — Broker-reported commissions and fees, plus components computed from an exact verified schedule.
- Live vs Backtest — The gap between how a strategy looked in testing and how it performs with real money.