Trading concepts
Understanding leverage
Leverage can increase both potential gains and potential losses. A small market movement can have a large impact on a leveraged position.
2 min read
What leverage changes
Leverage lets a trader open a larger position than the margin committed to that position. This can make price movement feel faster because profit and loss are calculated on the position size, not only the margin posted.
The same mechanism that increases potential profit also increases potential loss. Before using leverage, a trader should know the position size, entry price, margin used and liquidation level.
- Higher leverage reduces the distance between entry price and liquidation.
- Lower leverage gives a position more room to move, but risk still remains.
- Position sizing matters as much as direction.