What does leverage mean? Using a small amount of money to move the big market

Understanding Leverage in One Sentence

In trading, leverage is essentially a magnification tool — using a smaller amount of capital to control a larger position. For example, putting up $1,000 allows you to control a $100,000 trading position, which is called 1:100 leverage. The $1,000 is known as margin, the actual cost you need to pay.

How Do Leverage and Margin Work Together?

Different leverage ratios correspond to different margin requirements. The higher the ratio, the lower the required margin:

• 1:20 leverage → 5% margin needed
• 1:50 leverage → 2% margin needed
• 1:100 leverage → 1% margin needed
• 1:200 leverage → 0.5% margin needed
• 1:500 leverage → 0.2% margin needed

Brokers typically offer leverage options from 1:1 to 1:200, with some platforms even supporting 1:500. Choosing higher leverage means using less margin but also increases risk.

Example: How Leverage Affects Your Account

Suppose the EUR/USD price is 1.26837, and you decide to trade 1 lot (contract size 100,000):

Without leverage (1:1)

• Required investment: $126,837
• Fully occupies your account funds

With 1:200 leverage

• Required investment: 126,837 × 0.5% = $634.19
• You can control a position worth $126,837 with just $634

The actual capital used differs by nearly 200 times.

What Does Leverage Amplify? Profits and Losses

This is the key — profits and losses are both magnified.

Suppose EUR/USD rises by 3 pips (from 1.26837 to 1.26867):

• No leverage profit: $130, profit rate = 130 ÷ 126,837 = 0.1%
• With 1:200 leverage: still $130 profit, but profit rate = 130 ÷ 634.19 = 20.5%

Same percentage move, different capital used, vastly different returns.

Conversely, if the price drops by 3 pips:

• No leverage loss: $130, loss rate = 0.1%
• With 1:200 leverage: $130 loss, loss rate = 20.5%

Why Is Leverage a Double-Edged Sword?

When the market moves up by 3 pips, a 0.1% loss vs. a 20.5% loss shows that leverage can make gains quick but losses just as fast. More importantly, high leverage can trigger margin calls — your margin gets wiped out instantly, forcing a forced liquidation of your position.

Key Takeaways

• Leverage essence: Borrowed funds to expand trading size
• Margin: The minimum funds your account must hold
• Higher leverage ratio: Less margin required but greater risk
• Risk awareness: Profits and losses are magnified by leverage; high returns come with high risks