Glossary
What Is Leverage in Trading and How Does It Work
How many times larger the position is than the collateral. Leverage does not change the trade's risk — the stop and size do; it only sets how much collateral is locked and where liquidation sits.
How it works
Leverage lets you open a position larger than your deposit alone would support without borrowed capital from an exchange or broker: at 10× leverage, $100 of margin holds a $1,000 position. Raising leverage by itself doesn't change the stop's distance in price and doesn't change the risk percentage per trade, as long as position size is still calculated from risk and stop rather than from the maximum available size.
Leverage affects risk indirectly, through two channels: first, it determines how much margin is tied up in a position and how much stays free to absorb an adverse move; second, at higher leverage on the same position size, the liquidation price sits closer to entry, because there's less spare margin available.
So high leverage on its own doesn't make a trade riskier if position size is calculated from a chosen risk and stop — but it becomes dangerous fast if a trader uses all available leverage to maximize position size without tying it to a stop at all.
Example
Deposit is $1,000, leverage is 10×. Up to a $10,000 position can be opened. If position size is still calculated from 1% risk ($10) and a stop 2% away from price, the actual position size for that risk works out to $500 — leverage only lowers the margin required for that position, not the trade's actual risk.
Common mistake
A common mistake is using all available leverage to open the largest position possible, instead of a position sized from risk and stop. That sharply shrinks the distance to the liquidation price.
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Related terms
Frequently asked questions
- Does leverage increase the risk of losing your deposit?
- Not by itself, if position size is still capped by stop-based risk; risk grows when leverage is used to push size beyond that calculation.
- How is leverage different from position size?
- Position size is the trade's size, calculated from risk and stop; leverage is the ratio of that size to the margin reserved for it on the exchange.
See what leverage really cost you
The Trading OS journal pulls trades from exchanges and shows each result in R and in money, fees included — so you see where leverage cost more than planned.
No sign-up — the journal runs in your browser; an account is only needed for sync.