Leverage

Leverage means controlling a position larger than the money you have put up. With 10:1 leverage, $1,000 of your own money controls a $10,000 position. Every price move is then multiplied relative to your money: a 1% move in the asset becomes a 10% gain or loss on your capital. Leverage is built into futures, forex, CFDs and crypto perpetuals, and available on stocks through margin accounts.

How leverage works#

Leverage = Position size ÷ Your capital (margin)

At 20:1, a 5% move against you wipes out the account. At 100:1, which some brokers offer on currencies, a 1% move does the same.

Leverage across markets#

Why leverage is dangerous#

It magnifies losses as much as gains. A losing streak that would cost 5% unleveraged can cost 50% at 10:1.

It shortens the distance to forced liquidation. When losses eat into your margin, your broker or exchange will ask for more money or close your position, often at the worst moment. See Margin and Liquidations in Crypto.

Losses are harder to recover from. After a 50% loss, you need a 100% gain to get back to where you started.

It encourages oversizing. The leverage offered tells you how large a position you are allowed to take, not how large you should take.

Using leverage safely#

The safest way to think about leverage is to ignore it for sizing and focus on risk per trade:

1. Decide your risk per trade as a small percentage of your account, such as 1%.
2. Set your stop at a level that makes sense for the trade.
3. Calculate size so that hitting the stop loses only your planned amount. See Position Sizing.
4. Check effective leverage, the total value of your positions divided by your account. If it is high, your positions are probably too large or too concentrated.

When leverage makes sense#

Leverage is a tool, not a crime. Professional traders use it to make efficient use of capital, to hedge large portfolios with small margin deposits and to trade low volatility markets where unleveraged moves are tiny. What they have in common is strict risk control and position sizes based on risk, not on how much the broker allows.

Frequently asked questions#

What is a good leverage ratio for beginners?#

Low or none. Many experienced traders recommend starting without leverage and, when used, keeping effective leverage modest so that normal moves do not threaten the account.

Can leverage make me lose more than I deposited?#

With futures, margin stock accounts and some CFDs, yes. Some regulated retail accounts in the UK and EU have negative balance protection, which limits losses to the account balance.

Is 100:1 leverage good?#

High maximum leverage is not good or bad by itself, but using it fully is extremely risky: a 1% move against you would wipe out the position's margin.

Sources#

• FINRA, Margin accounts
• Wikipedia, Leverage (finance)