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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