What Is Leverage?
Leverage means borrowing money from your broker to increase the size of your position. If you have $1,000 and use 10:1 leverage, you can open a trade worth $10,000.
Your profits or losses are calculated on the full $10,000—not just your $1,000 deposit. That’s what makes leverage so powerful and so dangerous.
A Simple Example
Say you buy £10,000 worth of EUR/USD using 10:1 leverage with a £1,000 deposit. The euro rises 5% against the dollar.
Your profit is £500—that’s a 50% return on your £1,000. Not bad.
But if the euro falls 5%, you lose £500. That’s a 50% loss on your deposit. A 10% move against you wipes out everything.
The Types of Leverage
Margin trading (stocks): In the US, Regulation T allows up to 2:1 leverage for equities. You borrow from your broker to buy more shares than your cash would normally allow.
CFDs: Contracts for Difference let you speculate on price movements without owning the underlying asset. CFDs offer high leverage—often 20:1 or more in some jurisdictions. This is where most retail traders get burned because they don’t fully understand what they’re trading.
Forex leverage: Currency brokers commonly offer very high leverage—up to 500:1 in unregulated markets, 30:1 under EU regulations. Forex brokers offer this because currency pairs are generally less volatile than individual stocks.
The Dangers Nobody Talks About
Mental pressure: Large positions create stress. When you’re risking £5,000 on a trade instead of £500, your emotions take over. You hold losers longer and cut winners too early.
Liquidation risk: If your account falls below the maintenance margin level, your broker forcibly closes your position. This happens at exactly the wrong time—when prices are already moving against you—and you lose everything with no chance of recovery.
The compounding problem: One big loss makes it much harder to recover. Lose 50% of your account and you need a 100% gain just to break even. Lose 90% and you need 900%. This is why preserving capital matters more than making profits.
When Leverage Actually Makes Sense
Leverage isn’t inherently evil—it’s a tool. It makes sense when:
You have a proven, backtested trading strategy that has worked consistently over at least six months of live trading.
You understand risk management and use stop-losses on every single trade without exception.
You’re trading liquid markets with tight spreads—major forex pairs or index futures. Don’t leverage illiquid assets; slippage will destroy you.
The Bottom Line
If you’re new to trading, start without leverage. Learn the markets first, develop a strategy, and only consider leverage once you’ve proven consistent profitability over at least six months of live trading.
Most people who use high leverage lose money quickly. The brokers know this—that’s why they offer 500:1 leverage in the first place. They profit from your losses through margin calls and liquidations.
