How does leverage trading actually work? An article revealing the profits and risks behind it

Why Are Traders Talking About Leverage?

If you’ve been involved in the crypto or forex markets, you’ve probably heard the word “leverage.” But many beginners feel both excited and fearful about leverage — because it can amplify profits but also magnify losses.

In simple terms, leverage is the ability to control a large trading position with a small amount of capital (margin). For example, you have $1,000 but want to trade a $100,000 position—that’s leverage at work. The broker’s key role is to lend you the remaining $99,000 while requiring you to reserve $1,000 as “margin,” which is the collateral.

The Relationship Between Leverage Ratio and Margin

Different leverage multiples require different margin requirements:

Leverage 1:20 → 5% margin needed
Leverage 1:50 → 2% margin needed
Leverage 1:100 → 1% margin needed
Leverage 1:200 → 0.5% margin needed
Leverage 1:500 → 0.2% margin needed

The higher the multiple, the less margin you need. But there’s a catch: the higher the leverage, the greater the risk.

Practical Example: How Leverage Changes Your Returns

Suppose EUR/USD quotes at 1.26837, and you plan to trade 1 lot (a standard lot of 100,000 USD).

Without leverage (1:1):

• Required margin: $126,837
• Price moves up 3 pips to 1.26867, profit of $130
• Return: 130 ÷ 126,837 ≈ 0.1%

With 1:200 leverage:

• Required margin: $634.19
• Price moves up 3 pips to 1.26867, profit of $130
• Return: 130 ÷ 634.19 ≈ 20.5%

See the difference? The same price movement yields a return over 200 times higher with leverage. That’s the tempting part of leverage.

But what about the downside? Losses are amplified too

Now, suppose you get it wrong and the price drops from 1.26837 to 1.26807.

Without leverage:

• Loss of $130
• Loss rate: 0.1%

With 1:200 leverage:

• Same $130 loss
• Loss rate: 20.5%

If the price drops another 30 pips, the 1:200 leveraged account faces liquidation—your $634 margin could be wiped out entirely.

Key Considerations When Choosing Leverage

In reality, brokers usually offer leverage options from 1:1 up to 1:500. How to choose?

The key is not “the higher the multiple, the better,” but to consider:

• Beginners are advised to use 1:20 or 1:50 to reduce the risk of liquidation
• Experienced traders can use 1:100 to 1:200 to balance gains and risks
• Super high leverage like 1:500 should be avoided unless you have strong market confidence

Summary: Leverage Is a Double-Edged Sword

Leverage can help small accounts generate big profits, but it can also wipe out your capital in an instant. The key is to understand how it works, choose the appropriate leverage based on your risk tolerance, and never forget: profits and losses are amplified simultaneously.