Introduction to Leverage
Understand how leverage works and how to use it responsibly
Leverage allows you to control larger positions with a smaller amount of capital. While it can amplify profits, it equally amplifies losses. Understanding leverage is essential for responsible trading.
What is Leverage?
Leverage is essentially borrowed capital that allows you to open larger positions than your account balance would normally allow.
- 1:100 leverage = Control $100,000 with $1,000
- 1:50 leverage = Control $50,000 with $1,000
- 1:30 leverage = Control $30,000 with $1,000
Margin Requirements
Margin is the amount of money required to open and maintain a leveraged position. Higher leverage means lower margin requirements but higher risk.
- Initial margin: Required to open position
- Maintenance margin: Required to keep position open
- Margin call: Warning when equity falls too low
The Double-Edged Sword
A 1% market move with 1:100 leverage equals 100% return (or loss). This is why leverage must be used carefully and with strict risk management.
Responsible Leverage Use
Start with lower leverage (1:10 or 1:20) until you gain experience. Never use maximum available leverage, and always use stop-losses.
Key Takeaways
- Leverage amplifies both profits AND losses
- Higher leverage requires less margin but carries more risk
- Start with low leverage (1:10 to 1:20)
- Always combine leverage with strict risk management