What Is Leverage and How Does It Work?

Leverage is a way to increase the size of your trade by borrowing money from a broker or an exchange. In practice, the trader puts down only a part of the trade value, called margin, while the broker provides the rest. This makes it possible to control positions that are much larger than your own capital.

Leverage is widely used in trading, especially in Forex and cryptocurrencies. The main feature is that leverage can multiply both profits and losses. Even a small price move can bring a big gain but can also wipe out your account very quickly. That’s why it is important to understand how it works and what risks it brings.

Key Takeaways

• Leverage = borrowed money that lets traders control bigger positions with a small deposit (margin).
• It is common in Forex and crypto trading, but rules and risks differ.
• On Forex, leverage is usually limited by regulators (e.g., 1:30 in the EU, 1:50 in the US).
• On crypto exchanges, leverage can be much higher (up to 1:100 or more), but price swings can quickly wipe out accounts.
• Leverage multiplies both profits and losses — small price moves can bring big gains or big losses.
• Beginners should avoid high leverage, starting with small levels and focusing on risk management.
• For experienced traders, leverage can be a useful tool, but it requires discipline and caution.

What is Leverage?

Leverage shows how many times your position is bigger than the money you put in. For example, with leverage of 1:10, one hundred dollars lets you control a trade worth one thousand. With 1:100, the same one hundred dollars allows you to open a ten-thousand-dollar position.

It works like a loan: the broker lends you money so you can trade bigger amounts than you actually have.

How Does Leverage Work in Trading?

Trading with leverage is done through a margin account. The trader adds a deposit (the margin), which is used as collateral, and the broker provides the rest. Profit and loss are calculated on the whole trade size, not just your own money. This means that when the market moves in your favor, your profit grows faster. But if the market goes against you, the losses also grow much quicker.

Here’s an example. A trader has two hundred dollars and uses leverage of 1:5. This makes it possible to open a position worth one thousand dollars. If the price goes up by forty percent, the trader makes a profit of four hundred dollars — double the original deposit. But if the price drops by the same forty percent, the loss is also four hundred, and the entire deposit is gone.

The broker or exchange plays an important role here. They provide the borrowed money and monitor the margin level. If losses become too high, the trader receives a margin call — a request to add more funds. If this doesn’t happen, the position is closed automatically to protect both sides from further loss.

Leverage in Crypto and Forex

In the Forex market, leverage is usually limited by regulators. In the United States, the maximum leverage for major currency pairs is 1:50. In the European Union, the limit for retail traders is usually 1:30. Currency pairs normally move in small steps, so moderate leverage helps traders earn from even small price changes.

The crypto market is very different. Many exchanges offer extremely high leverage — up to 1:100 or even 1:125, like on Binance Futures or Bybit. But cryptocurrencies are highly volatile, which makes this very risky. A price change of just one percent against your position can liquidate it and wipe out your margin. For this reason, many platforms now limit leverage for beginners, often to 1:20, to reduce the risk of fast losses. In short, Forex is more stable and regulated, while crypto gives more opportunities but also much bigger risks.

Benefits and Risks of Leverage

The main benefit of leverage is the chance to multiply profits. With borrowed funds, a trader can open bigger positions and use capital more efficiently, sometimes even spreading money across different trades.

At the same time, leverage carries serious risks. Losses grow just as fast as profits. High leverage can turn even small price changes into a danger for your account. Margin calls and forced liquidation are also common if the account balance drops too much. On top of that, there are fees and interest for using borrowed money, which increase trading costs. For many beginners, high leverage becomes the fastest way to lose money.

Who Should Use Leverage?

For beginners, leverage is usually not recommended. Most new traders lose their accounts because they don’t know how to manage the risks. It is better to start trading without leverage or with very small levels, like 1:5 or 1:10, until you build experience and confidence.

For experienced traders, leverage can be a useful tool. Professionals use it to increase returns, hedge positions, or work with special strategies. But even they prefer moderate levels, because extreme leverage like 50x or 100x can cause very big losses in just seconds.

The Bottom Line

Leverage is a powerful tool that gives traders more opportunities but also more risks. It can increase profits and help use capital more effectively, but it can just as easily destroy your account if used without caution.

The golden rule is never to risk more than you can afford to lose. Start with small leverage, always use stop-loss orders, and manage risks carefully. In responsible hands, leverage can be helpful, but for beginners it is more like a trap.