Leverage Explained: Opportunity & Danger
Leverage is the most misunderstood number in trading. Used well it frees capital; used blindly it ends accounts.
The mechanics
Leverage is exposure divided by margin. 1:100 means $100 of notional per $1 of margin. A 1% favourable move doubles your margin; a 1% adverse move wipes it. The bigger the leverage, the smaller the move that ends you.
Why regulators cap it
Retail data shows most accounts lose money, and high leverage accelerates losses. Caps (1:30 in the EU, 1:50 in the US) are consumer protection, not a limit on professionals who can opt up after proving experience.
Prudent use
Trade with far less than the maximum. Risk 1–2% of equity per trade, set a stop, and treat leverage as a capital-efficiency tool, not a way to get rich fast. The best traders use the least leverage they can.
Related glossary terms
New to the jargon here? These plain-English definitions will help.
