What is leverage in trading? How it works and why it's risky

A simple example

With 1,000 and 10:1 leverage you can control a position worth 10,000. If the market moves 2% in your favour, the position gains 200, which is 20% of your 1,000. If it moves 2% against you, you lose 200, again 20% of your money. A 10% move against you would remove your entire deposit.

What margin is

Margin is the deposit your broker holds while the leveraged position is open. If losses eat most of it, the broker issues a margin call or closes your positions automatically to protect itself. This can happen quickly, and you do not get to wait for the price to return.

Retail leverage limits in Europe and the UK

Regulators set maximum leverage for retail clients of leveraged products such as CFDs. The European Securities and Markets Authority (ESMA) limits are 30:1 for major currency pairs, 20:1 for other currency pairs, gold and major indices, 10:1 for other commodities and smaller indices, 5:1 for individual shares, and 2:1 for crypto. The UK's FCA applies the same limits. Rules differ in other countries and for professional clients, so always check the rules that apply to you.

Why leverage hurts beginners

It raises the cost of every mistake:

• Small price moves become big account moves, so normal volatility can trigger a forced close.
• It encourages position sizes far bigger than your risk rules allow.
• Losses can exceed what you planned, and without negative balance protection, even more than your deposit.

Using it carefully

If you ever use leverage, treat it as extra capacity you rarely use, not as a way to make small accounts big. Decide your risk per trade first, set a stop, and size the position from that. Leverage should never decide your position size.