Learn how borrowed capital can amplify both gains and losses in your trading portfolio
Leverage is a financial tool that allows you to control a large position with a relatively small amount of capital. It's essentially a loan provided by your broker, enabling you to amplify potential returns. However, leverage is a double-edged sword that also magnifies potential losses.
Leverage is expressed as a ratio, such as 10:1, 50:1, or 100:1. A 100:1 leverage means that for every $1 of your own capital, you can control $100 in the market.
Total position value: $5,000
Required capital: $5,000
Total position value: $5,000
Required capital: $50
When trades move in your favor, leverage multiplies your profits relative to your invested capital.
Conversely, when trades move against you, leverage amplifies losses and can quickly erode your capital.
| Leverage Ratio | Required Margin | Risk Level | Suitable For |
|---|---|---|---|
| 1:1 (No Leverage) | 100% | Very Low | Conservative investors |
| 10:1 | 10% | Low | Beginner traders |
| 50:1 | 2% | Medium | Experienced traders |
| 100:1 | 1% | High | Professional traders |
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