Leverage is one of the most fascinating — and sometimes most dangerous — concepts in trading, whether applied to stocks, forex, or cryptocurrencies. It allows an investor to control a position much larger than their actual capital by using borrowed funds from a broker.
For example, with only €100, a trader can open a position worth €1,000 using 10x leverage. This mechanism multiplies potential gains but also increases potential losses, making it a tool that must be used with caution.
In this article, we will explore in detail the definition of leverage, how it works in practice, its advantages and risks, as well as practical examples to better understand its impact.
Key Takeaways
- Leverage allows you to trade with exposure larger than your actual capital.
- It amplifies both potential gains and losses.
- Too high leverage can lead to rapid liquidation of your position.
- When used wisely, it can be a strategic tool to optimize your capital.
Definition and Origin of Leverage in Trading
Leverage is a financial mechanism that allows a trader to increase their investment capacity by borrowing funds from their broker. It is often expressed as a ratio or multiplier: x2, x5, x10, x50, or even x100 depending on the platform.
The concept comes from traditional finance, particularly futures markets and margin trading. With the rise of cryptocurrencies, it has become even more popular, as exchanges like Binance, Bybit, or Kraken offer very high leverage to retail traders.
👉 Simple example:
- Available capital: €500
- Leverage: x10
- Actual exposure: €5,000
This means the trader can speculate as if they held €5,000, even though they only invested €500.
This system relies on initial margin (the trader’s own capital) and maintenance margin (the minimum amount required to keep the position open). If losses exceed a certain threshold, the position is automatically closed — this is called liquidation.
How Leverage Works in Practice
To understand how leverage works, it’s important to distinguish three key concepts:
- Initial margin: This is the trader’s collateral deposit (for example, €100 to open a position).
- Total exposure: This is the actual position size, calculated by multiplying the margin by the leverage.
- Liquidation: This is the point at which losses consume all invested capital, forcing the position to be automatically closed.
👉 Practical example (crypto trading on Bitcoin with 10x leverage):
- Available capital: €200
- Leverage: x10
- Open position: €2,000 on BTC
➡️ If Bitcoin rises by 5%, the trader gains €100 (+50% of their capital).
➡️ If Bitcoin falls by 5%, the trader loses €100 (-50% of their capital).
With an unfavorable move of -10%, the entire stake is liquidated. This is why leverage is a double-edged sword: it can multiply profits but also wipe out capital in minutes.
📌 Note: Some platforms offer leverage up to 125x on Bitcoin. However, a small move of just -0.8% against the position can completely liquidate the account.
Why Use Leverage in Trading?
Despite its risks, leverage offers several advantages sought after by traders:
1. Optimize capital
A trader with limited funds can access larger positions, allowing them to take advantage of market movements without needing a huge amount of capital.
2. Maximize profits
With leverage, relatively small price movements can generate significant returns. This is especially attractive for scalping and day trading strategies.
3. Diversify strategies
A trader can spread their capital across multiple leveraged positions rather than investing it all at once.
4. Hedging
Some investors use leverage to protect against declines by opening short positions against their portfolio.
👉 Example: A long-term Bitcoin investor might open a leveraged short position to offset a potential temporary drop.
However, these advantages must always be balanced with risk management. Improper use of leverage can lead to liquidation in seconds, especially in highly volatile markets like cryptocurrencies.
