Does using leverage increase trading risk?

Leverage increases both potential gains and potential losses, which means risk exposure becomes higher compared to unleveraged positions. When a trader uses leverage, their account balance becomes more sensitive to price movements because profits and losses are calculated on the full notional value of the position — not just the margin deposited. The higher the leverage applied, the greater this sensitivity becomes.

To illustrate, consider a trader who opens a €10,000 position. Without leverage, a 1% adverse price movement results in a $100 loss against the full €10,000 invested. With 1:10 leverage, the same €10,000 position requires only $1,000 in margin, but the $100 loss now represents 10% of the deposited capital. At 1:20 leverage, that same market move would consume 20% of the margin. This proportional amplification is the primary reason why leverage is considered a significant risk factor in trading.

However, it is important to understand that leverage itself is neither inherently good nor bad — it is a tool whose impact depends entirely on how it is used. Traders who apply leverage responsibly — by sizing their positions conservatively, setting clear stop-loss levels, and maintaining a comfortable margin buffer — can manage the additional risk effectively. On the other hand, over-leveraging an account by opening positions that are too large relative to available capital is one of the most common reasons traders experience significant losses. For this reason, risk management should always be the first priority when using leverage, and traders are encouraged to only take on exposure they fully understand and can afford to sustain if the market moves against them.