Definition of leverage

Leverage is the use of borrowed money (called capital) to invest in the financial markets with the expectation of making greater profits. The capital is provided by the broker as collateral for the purpose of increasing the trader's ability to trade. It is a kind of loan, that traders take from brokers in a certain proportion to the funds in their account, with the aim of increasing their chances to make more profit. Depending on the market in which the trader is operating, the leverage can be given in a ratio from 1:2 to 1:2000.

Trading in financial markets with leverage is called margin trading. A broker can charge a commission fee for providing such a loan, or earn on the spread without charging a commission. A broker's profit is directly related to the trader's increased trading opportunities.

How leverage works

The broker provides the trader with capital in a certain proportion to the size of their deposit. For example, the trader has $10,000 in his account, but this amount is not enough to trade the selected asset.

The forex broker provides the trader with additional funds in proportion to his deposit – say 1:100. The trader can now use an amount that is 100 times the sum in his account, i.e. not only his own $10,000 but $1,000,000.

In theory, a trader cannot lose money provided by a broker. The broker, in order to protect his finances, sets a loss threshold for the trader in the automated trading system. It can be equal to the amount on the trader's account, i.e., $10,000 in this case, or a certain percentage of this amount. As soon as this threshold is reached, all of the trader's positions are automatically closed.

Example of using leverage

The trader has the sum of $10,000 of their own funds on their account, which is not enough to open a 1 lot EUR/USD position: the amount of margin collateral – a kind of pledge – is $108,891. The trader has the choice to either open a smaller position with risk management and operate with only that amount or use leverage as an alternative.

The trader chooses the second option, with the broker lending him a loan at a ratio of 1:100 to the amount available. The trader opens a 1 lot EUR/USD position at 1.08891. The margin amount is $108,891, distributed as follows: $1088.91 of the trader's personal funds (1% of the total margin) is reserved in his account, and the remaining amount is automatically added by the broker.

In the terminal, the fixed amount of $1088.91 is displayed in the margin collateral column – the remaining amount added by the broker in the form of leverage is not shown in the terminal for the trader's convenience. The reserved funds cannot be used by the trader to open any other positions during the whole period when the position is open.

The trader closed the position when the price reached 1.08941. The difference between the opening and closing price is 50 points, meaning that with the order volume of 1 lot, the trader's profit is $50. After the position was closed, the margin amount was returned to the trader's balance.

The risks of using leverage

By using leverage, a trader can proceed with opening positions with larger volumes. However, an open position with a large volume of leverage can go in the opposite direction to what the trader had predicted, and the loss could very quickly reach a critical value. Theoretically, the profit or loss with leverage is proportionately higher than without it.

Advantages and disadvantages of leverage


  • Enables trading of high-value assets
  • Enables trading large volumes
  • Opportunity to increase profits
  • Conditional free credit from a Forex broker


  • Increased risks in trading
  • Leverage fee for trading in the stock market
  • Risk of misusing trading volumes
  • Limited list of trading instruments available for leveraged trading