What does leverage mean in trading?

Leverage allows a user to control a larger position using a smaller amount of capital, increasing both potential gains and losses. It is expressed as a ratio — such as 1:10, 1:20, or 1:30 — which indicates how many times larger the total market exposure is compared to the margin deposited. For instance, with 1:10 leverage, a trader can open a €10,000 position by committing just €1,000 of their own capital.

This mechanism makes leverage one of the most powerful tools available to traders, as it enables meaningful market participation even with a relatively modest account balance. Without leverage, a trader would need to deposit the full value of every position, which would significantly limit the range of instruments and opportunities they could access. Leverage effectively lowers the barrier to entry and allows for more flexible capital allocation across multiple positions or strategies.

However, it is essential to understand that leverage is a double-edged sword. While it amplifies profits when the market moves in the trader's favour, it equally amplifies losses when the market moves against them — and those losses are calculated on the full position value, not just the margin deposited. A relatively small adverse price movement can have a significant impact on the account balance, and in extreme cases, losses can exceed the initial deposit. For this reason, traders should approach leverage with caution, ensure they fully understand how it affects their exposure, and consistently use risk management tools such as stop-loss orders to protect their capital.