Leverage means the use of borrowed money or margin to increase the size of your trade beyond the capital you allocate. In simple terms, it means using a smaller amount of your own money to control a larger position.
How does leverage work?
Let’s say you want to open a position worth €200, but you only have €100 in your trading account. With 2x leverage, you can open that €200 position by using your €100 as margin. The platform effectively lends you the remaining €100 for the duration of the trade.
This means you’re trading with double the exposure of your actual funds, which can amplify both potential profits and losses.
Why do traders use leverage?
Traders use leverage to:
- Increase exposure to market opportunities without needing to deposit the full value of the position.
- Enhance the impact of small price movements.
- Deploy capital more efficiently across different strategies or assets.
What are the risks of leverage?
While leverage can help increase your potential returns, it also increases the risk. If the market moves in the opposite direction of your position, losses will also be magnified.
For example:
- With 2x leverage, a 5% move in the market could result in a 10% gain - or a 10% loss - on your initial capital.
- If your losses exceed the margin available in your account, your position may be automatically closed (liquidated) to protect against further loss.
How is leverage managed?
Trading platforms apply certain controls to help manage the risks of leverage:
- Margin requirements: The minimum amount of capital needed to open and maintain a leveraged position.
- Liquidation mechanisms: Systems that automatically close positions if your account balance falls below the required margin.
- Leverage limits: Restrictions based on client type, experience, and regulatory requirements.
Leverage is a useful tool for increasing exposure and flexibility in trading - but it should be used carefully. It’s important to understand how leverage affects both risk and reward, and to ensure that your trading strategy aligns with your personal risk tolerance.
Investing involves risks. The value of investments can go up as well as down and you may receive back less than your original investment or lose your entire investment. Investing with leverage means the value of your investment fluctuates more than the price of the underlying asset. One Trading does not provide investment advice and investors should make their own decisions or seek independent advice.