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What Is Leverage in Trading? Pros, Cons, and Risks Explained

What Is Leverage in Trading? Pros, Cons, and Risks Explained

What Is Leverage in Trading?

In simple terms, leverage means borrowing funds from your broker to open larger trades than your account balance would normally allow. It’s expressed as a ratio, such as 1:10, 1:50, or even 1:500.

For example, with 1:100 leverage, a $1,000 deposit gives you the ability to control $100,000 worth of trades.

Leverage is not a free loan - your broker requires margin as collateral, and losses can exceed your deposit, if not managed properly.

How Leverage Works in Forex and CFDs

Margin Requirement: The broker sets a percentage of the trade value (the margin) that you must deposit.
Leverage Ratio: Determines how much larger your position can be compared to your margin.
Amplified Results: Small price changes have a much bigger effect on your profit or loss.
Higher leverage increases both potential reward and risk exposure.

Pros of Using Leverage

Increased Market Exposure: Trade larger positions without needing huge capital.
Potential for Higher Returns: Even small moves can deliver significant gains.
Flexibility: Allows both small and professional traders to access global markets.

Cons and Risks of Leverage

Amplified Losses: Just as profits are magnified, so is capital loss.
Margin Calls: If your balance drops below margin requirements, your broker may close trades automatically.
Overtrading Risk: High leverage can tempt beginners to take on more risk than they should.

Best Practices for Safe Leverage Trading

Start Small: Use lower leverage (like 1:10 or 1:20) until you gain experience.
Always Use Stop-Loss Orders: Protect your capital from sudden market swings.
Risk Management: Never risk more than 1–2% of your capital on a single trade.