What exactly is leveraged trading? Understand what leverage means in one article

The Essence of Leverage and Margin

Simply put, leverage is: using a small amount of capital to control a large trading position. The “small amount of capital” here is called margin.

How does it work specifically? Suppose you want to trade a $100,000 position, but you only have $1,000 in your account. The broker might say: “Sure, you only need to put up $1,000 as margin, and I will lend you the remaining $99,000.” This way, you can control a $100,000 trading position with just $1,000. This ratio is called 1:100 leverage, meaning the margin accounts for 1% of the position size.

Margin Requirements at Different Leverage Ratios

Common leverage options in the market range from 1:1 to 1:500. The higher the leverage ratio, the less margin is required:

• 1:20 leverage → 5% margin required
• 1:50 leverage → 2% margin required
• 1:100 leverage → 1% margin required
• 1:200 leverage → 0.5% margin required
• 1:500 leverage → 0.2% margin required

In simple terms, the higher the leverage ratio, the less margin you need to use, but the greater the risk.

Leverage in Actual Trading

Let’s look at a specific example. When the EUR/USD price is at 1.26837, you want to trade 1 lot (100,000 units), with a position value of $126,837.

Cost comparison with different leverage options:

If trading with 1:1 (no leverage), you need to pay the full $126,837 margin.

But if you choose 1:200 leverage, you only need to pay $126,837 × 0.5% = $634.19 in margin. The difference is 200 times!

The “Double-Edged Sword” of Gains and Risks

This is the core meaning of leverage—it can amplify gains but also magnify losses.

Suppose the EUR/USD price rises by 3 pips, from 1.26837 to 1.26867:

• With 1:1 leverage: profit is $130, return = 130 ÷ 126,837 ≈ 0.1%
• With 1:200 leverage: profit is still $130, return = 130 ÷ 634.19 ≈ 20%

The same price movement results in a 200-fold difference in return depending on leverage. Conversely, if the price drops by 3 pips, losses are similarly magnified.

Key Points of Leveraged Trading

• Leverage allows you to control larger trading positions with less margin
• Different leverage ratios correspond to different margin requirements
• Low leverage = lower risk but limited returns; high leverage = higher returns but enormous risk
• Understanding what leverage means is just the first step; choosing the right leverage ratio is key to successful trading

Leverage is like a magnifying glass, infinitely amplifying market fluctuations. Beginner traders should start with low leverage, gradually gaining experience and risk awareness.