A small deposit moves a larger sum:it lifts the gain and the loss, as one.
The ability to control a large position with a relatively small amount of capital.
For example, 1:100 leverage means $1,000 controls $100,000. Leverage amplifies both profits and losses.
In plain words
Leverage lets a trader hold a position worth much more than the money they put up for it. The money put up is called margin, and the ratio between the position and the margin is the leverage: at 1:100, a margin of 1,000 supports a position of 100,000.
leverage = notional value ÷ margin
See it move
Margin moves a little: Position moves several times as far
Why it matters
Profit and loss are calculated on the full position, not on the margin, so leverage multiplies the effect of every price move on the account. It is the main reason losses in leveraged trading can be fast, and large relative to the money deposited.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
With leverage of 1:100, a trader opens a position with a notional value, meaning its full value, of 100,000.
- 1Margin required100,000 ÷ 100 = 1,000
- 2The price moves 0.5% against the position100,000 × 0.005 = 500 lost
- 3As a share of the margin500 ÷ 1,000 = 0.5, or 50%
A move of half of one per cent in the price removes half of the margin put up.
A common mistake
Leverage is sometimes described as extra money to trade with. It is extra exposure: the trader’s own funds bear the whole of any loss on the larger position.
Check yourself
Learn more
- Academy lessonIntroduction to forex tradingWhat the foreign exchange market is, how currency pairs are quoted, when the four sessions trade and what a newcomer should learn first.
- Academy lessonLeverage and marginHow leverage ratios, required margin, margin calls and stop-outs work, with the arithmetic that shows why losses scale exactly as gains do.
- GuideTen common trading mistakes and how they happenNo plan, too much leverage, no stop, too many trades: the errors are well known and still routinely made. Each is described here with the habit that guards against it.
Educational information, not investment advice or a recommendation to trade.