Leverage

What is leverage?

Leverage is a facility offered by brokers that lets a trader open a position far larger than the cash they actually deposit, by effectively borrowing the rest. It’s expressed as a ratio, such as 1:100 or 1:500, meaning every $1 of the trader’s own money can control $100 or $500 worth of the underlying instrument.

Leverage doesn’t create free money — it simply scales up both the size of a position and the size of every price move within it. A 1% favorable move on a leveraged position can produce a much larger percentage return on the trader’s actual deposit than the same move would on an unleveraged one. The reverse is equally true: losses are scaled up by exactly the same factor.

A worked example

Suppose a trader wants to open one standard lot of EUR/USD — a position worth 100,000 units of the base currency, roughly $108,500 at an exchange rate of 1.0850.

• Without leverage, the trader would need the full $108,500 in the account.
• At 1:100 leverage, the required deposit (margin) is only about $1,085 (1/100th of the notional value).
• At 1:500 leverage, it drops to about $217.

If EUR/USD then moves 50 pips in the trader’s favor, the dollar gain is the same in every case (roughly $500 on a standard lot) — but that $500 represents a far larger percentage return on a $217 deposit than on a $108,500 one. The same math applies in reverse to a loss.

Why leverage matters

Leverage is what makes forex and CFD trading accessible with relatively small account sizes, but it is also the single biggest amplifier of risk in trading. Higher leverage means a smaller adverse price move can wipe out a larger share of the deposit, which is why regulators in many jurisdictions impose a leverage cap on retail accounts, and why disciplined position sizing and stop-losses matter more, not less, as leverage increases.

Quick recap

• Leverage lets a trader control a position larger than their own deposit, using borrowed exposure from the broker.
• It multiplies both gains and losses by the same ratio — it does not change the odds of a trade working out.
• The deposit required to use leverage is called margin; running low on it can trigger a margin call.
• Higher leverage means higher risk per unit of capital — always paired with careful risk management.

Trading forex and CFDs on leverage carries a high level of risk and may not be suitable for all investors; losses can exceed your initial deposit unless your account has negative balance protection.