Trading Defined
Risk ManagementIntermediate

Leverage

Leverage means controlling a position larger than your own money — through borrowing or a contract that needs only a deposit — so that gains and losses are both multiplied.

Leverage lets a small amount of money control a much larger position. That sounds like an advantage, and sometimes it is. But leverage does not make a trade more likely to succeed; it only makes every price move count for more — in both directions. It is the most common reason new traders lose their accounts quickly, so it deserves to be understood precisely, with numbers.

Category
Risk Management
Reading time
9 min
Also called
Leveraged trading, Gearing, Leverage ratio
Updated

Leverage in plain words

Imagine you have $1,000 and a broker lets you trade as if you had $5,000. That is 5× leverage. If the price rises 4%, a $5,000 position gains $200 — that is 20% of your own $1,000. Wonderful.

Now the price falls 4% instead. The position loses $200, and that is also 20% of your money. A 20% fall in the price would lose $1,000 — everything you put in.

So leverage is a multiplier: your result ≈ leverage × the price move. It multiplies good outcomes and bad ones equally, and it adds costs, because borrowed money or leveraged contracts are rarely free.

How leverage works, step by step

The mechanics differ between markets, but the sequence is the same: deposit, open a larger position, and keep enough equity to stay open.

  1. You deposit collateral

    Your own money in the account is the Margin or Collateral. It is what you can lose, and in some products you can lose more than it.

  2. You open a position larger than your money

    With a margin loan the broker lends you the difference; with Futures Contract or other derivatives, the contract simply requires a deposit that is a fraction of its full value. Either way, your Exposure is larger than your equity.

  3. Every price move hits your equity, multiplied

    Profits and losses are calculated on the full position, but they are added to or taken from your own money. At 5×, a 1% move changes your equity by about 5%.

  4. You must keep a minimum amount of equity

    Brokers and exchanges require you to keep equity above a maintenance level. If losses push it below, you receive a margin call to add funds or reduce the position.1

  5. If equity runs too low, the position is closed for you

    If you cannot or do not meet the call, the broker can sell your positions without your consent, and you do not get to choose which ones.1 On crypto derivatives platforms this automatic closing is called Liquidation.

  6. Costs keep running while you hold

    Borrowed money charges interest; perpetual futures charge or pay funding; CFDs and forex often charge an overnight financing fee. On a leveraged position these costs are charged on the full size, not just your money.

Worked examples

Example 1 — 5× leverage, price up 4%

Profit

You have $1,000 and open a $5,000 position (5× leverage). The price rises 4%.

Assumptions
  • Fees, interest and funding are ignored to show the pure effect of leverage.
Example 1 — 5× leverage, price up 4% — calculation
Position size ($1,000 × 5)$5,000.00
Gain on the position (4% of $5,000)+$200.00
Your equity after the move$1,200.00
Return on your own money+20%

A 4% price move became a 20% gain on your money — five times the move, because the position was five times your money.

Example 2 — The same trade, price down 4%

Loss

Same position, but the price falls 4%.

Example 2 — The same trade, price down 4% — calculation
Loss on the position (4% of $5,000)−$200.00
Your equity after the move$800.00
Return on your own money−20%
Gain now needed to get back to $1,000+25%

The loss is multiplied exactly like the gain. And recovering is harder than losing: after a 20% loss you need a 25% gain to break even, and after a 50% loss you need 100%.

Example 3 — How far the price can move before your money is gone

Rule of thumb

With your own money fixed at $1,000, here is the adverse price move that would erase it at different leverage levels.

Example 3 — How far the price can move before your money is gone — calculation
1× (no leverage)−100%
2×−50%
5×−20%
10×−10%
50×−2%
100×−1%

The rule of thumb is 100% ÷ leverage. In practice you are usually closed out before that point, because platforms liquidate when equity falls below the maintenance requirement, and fees eat into the remaining buffer. At 100×, a 1% move — common within a single day in many markets — is enough.

Figure 1

Leverage multiplies the change in your own money

How leverage multiplies the change in your own moneyThe horizontal axis is the price change from −25% to +25%; the vertical axis is the change in your own money. Without leverage a 10% fall costs 10%. At 2× it costs 20%, at 5× it costs 50%, and at 10× a 10% fall wipes out 100% of your money. At 5× a 20% fall does the same.-100%-50%+50%+100%0%-20%-10%+10%+20%Price changeChange in your own money1×2×5×: all of your money gone at -20%5×10×: all of your money gone at -10%10×
Before costs, the change in your own money is roughly the price change multiplied by the leverage. Higher leverage makes the line steeper, so it reaches −100% sooner: −50% at 2×, −20% at 5×, −10% at 10×.

Try it: leverage calculator

Enter your own money, the leverage and a price move (use a minus sign for a fall). The calculator shows the position size, the result and the move that would wipe out your money. It runs in your browser.

Calculated effect of leverage
Position size (5× your money)$5,000.00
Profit or loss on the position−$200.00
Change in your own money−20.0%

At 5×, a price move of about 20% against you is enough to lose all of your own money — and most platforms liquidate you before that point because of maintenance margin.

Simplified: ignores interest, funding, fees and slippage. With margin accounts, futures and forex, losses can exceed the money you deposited.

Where leverage comes from in different markets

“Leverage” describes the same effect everywhere, but the mechanics, limits and risks depend on the product.

AspectHow the leverage is createdWhat to watch
Shares on marginA loan from your broker; in the US, Regulation T lets you borrow up to 50% of the purchase price of eligible stocks.2Interest on the loan, margin calls, and losses that can exceed your deposit.3
FuturesA deposit (margin) that is typically a small percentage of the contract’s value.4Gains and losses are settled daily, and margin calls must be met.5
ForexHigh leverage offered by forex dealers.You can lose all of your initial capital and more.6
Crypto derivativesLeverage chosen per position on the platform, often very high.Automatic liquidation, funding payments, and isolated vs. cross margin settings.
OptionsA small premium controls exposure to 100 shares per standard US equity option.7Buyers can lose the whole premium; some option sellers face unlimited losses.3
Leveraged ETFsThe fund uses derivatives to multiply an index’s return.Most reset daily, so results over longer periods can differ significantly from the stated multiple.3

Why traders use leverage

  • Capital efficiency

    A trader can control a position while keeping the rest of their money elsewhere — for example, a futures position that needs only a fraction of its value as margin.

  • Hedging

    A business or fund can offset a large exposure with a relatively small margin deposit, using futures or options to protect against price moves.

  • Small price moves

    In markets that usually move only fractions of a percent per day, such as major currencies, leverage is how traders make those small moves meaningful.

  • Shorting

    Short positions in shares always involve borrowing, so they are inherently leveraged. See short selling.

Advantages and disadvantages

Advantages

  • Lets you control a larger position with less of your own money.
  • Frees up capital for other uses or for diversification.
  • Makes hedging large exposures affordable.

Disadvantages

  • Multiplies losses exactly as much as gains, and losses can exceed what you deposited.3
  • Small adverse moves can trigger margin calls or liquidation, closing you out before a trade has time to work.1
  • Interest, funding and financing fees are charged on the full position size.
  • The bigger the loss, the harder the recovery: −50% needs +100% to get back to even.
  • It encourages over-trading and over-sizing, because potential gains look large.

Going deeper

Read as far as you need. Each level builds on the one before it.

Think in position size, not in “×”

Beginner

The leverage number on a platform is less important than the actual size of your position compared with your money. If a position loses what your stop allows, how much of your account is that? Size every leveraged trade from your stop loss and your risk per trade, and the leverage becomes a by-product rather than a choice.

Margin calls, maintenance and forced selling

Intermediate

Leveraged accounts must keep equity above a maintenance requirement. Under FINRA rules for US margin accounts, equity must generally stay at or above 25% of the market value of the securities, and firms can set higher requirements and raise them at any time.1

If equity falls below the requirement, the firm can sell your positions to cover the shortfall, may do so without contacting you first, and decides which positions to sell.1 You may also remain responsible for any amount still owed.8

Liquidation prices, margin modes and compounding

Advanced

On crypto derivatives platforms, each position has a liquidation price calculated from the entry, the leverage and the maintenance margin rate. With isolated margin only the collateral assigned to that position is at risk; with cross margin the whole account backs every position, which delays liquidation but puts more money on the line. See Cross and Isolated Margin.

Leverage also changes how returns compound. A leveraged position that gains 10% and then loses 10% does not end where it started, and the gap grows with leverage — one reason daily-reset leveraged ETFs drift away from their target multiple over time.3

Common mistakes

  1. Choosing leverage before choosing risk

    Picking “10×” and then deciding the trade is backwards. Decide how much you can lose, place a stop, size the position — then see what leverage that implies.

  2. Confusing the liquidation price with a stop loss

    Being liquidated is not a risk-management plan. By the time it happens, most of your margin is gone, and liquidation fees may take more.

  3. Ignoring costs

    Interest, funding and financing fees are charged on the full position. Over days or weeks they can turn a correct idea into a losing trade.

  4. Adding to losing leveraged positions

    Averaging down with leverage increases both the size and the leverage of a position that is already against you, pulling the liquidation price closer.

  5. Assuming you can only lose what you deposited

    With margin accounts, futures and forex, losses can exceed your deposit, and you may owe the difference.36

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1You use 10× leverage and the price moves 3% against you. Roughly how much of your own money have you lost, before costs?
Q2At 20× leverage, roughly what adverse price move would erase all of your own money (ignoring fees and maintenance margin)?
Q3Your account falls 50% after a leveraged loss. What gain do you need to get back to where you started?

Key points to remember

  1. Leverage means your position is larger than your own money; your result ≈ leverage × the price move.
  2. It multiplies losses exactly as much as gains — it changes the stakes, not the odds.
  3. Roughly 100% ÷ leverage is the move that erases your money; liquidation usually comes earlier.
  4. Margin calls and forced selling can close you out at the worst time, and losses can exceed your deposit.
  5. Size positions from your stop and risk per trade; let leverage be the result, not the starting point.

Frequently asked questions

Is leverage the same as margin?

They are related but not the same. Margin is the collateral you deposit; leverage is the ratio between your position and that collateral. A $1,000 margin supporting a $10,000 position is 10× leverage.

Can I lose more than I deposited?

With margin accounts, futures and forex, yes — losses can exceed your deposit and you may owe the broker money.36 Some platforms and jurisdictions offer negative-balance protection for certain retail products, so check your provider’s terms.

What leverage should a beginner use?

The safest answer is none until you can trade a plan consistently without it. When you do use leverage, let it follow from your position sizing — the risk per trade should stay the same whether or not leverage is involved.

Why do platforms offer 100× leverage if it is so risky?

High leverage attracts traders and generates fees, funding and liquidation revenue for platforms. A higher maximum does not mean it is sensible to use it; at 100×, a 1% move against you is enough to lose your margin.

Further learning

  • Stop Loss

    The tool that keeps a leveraged loss to a planned size in normal markets.

  • Margin

    How collateral, initial margin and maintenance margin work.

  • Liquidation

    What happens when a leveraged position runs out of margin.

  • Short Selling

    Short selling is a leveraged position by nature.

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. FINRA. Know What Triggers a Margin Call (opens in a new tab) Checked .
  2. Investor.gov (SEC). Investor Bulletin: Understanding Margin Accounts (opens in a new tab) Checked .
  3. Investor.gov (SEC). Leveraged Investing Strategies – Know the Risks Before Using These Advanced Investment Tools (opens in a new tab) Checked .
  4. U.S. Commodity Futures Trading Commission. Economic Purpose of Futures Markets and How They Work (opens in a new tab) Checked .
  5. U.S. Commodity Futures Trading Commission. CFTC Glossary (opens in a new tab) Checked .
  6. Investor.gov (SEC). Foreign Currency Exchange (Forex) Trading For Individual Investors (opens in a new tab) Checked .
  7. Investor.gov (SEC). An Introduction to Options – Investor Bulletin (opens in a new tab) Checked .
  8. FINRA. Rule 2264. Margin Disclosure Statement (opens in a new tab) Checked .

Read more elsewhere

Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.