Leverage

Leverage is a mechanism that allows a trader to open a position larger than their own available capital.

If a trader uses 10x leverage and provides $1,000 of their own capital as collateral, the nominal position may be up to $10,000 under the platform’s rules.

Formula

In simplified form, leverage can be represented as the ratio of position size to the trader’s own capital:

Leverage = Position Size / Trader Capital

The higher the leverage, the smaller the market movement required to produce a large percentage change relative to the trader’s own capital.

Leverage and risk

Leverage does not change the market movement itself. It changes the financial effect of that movement relative to the trader’s collateral. It therefore increases both potential returns and potential losses.

Insufficient collateral can cause a position to reach its liquidation level. The exact level depends on margin, position size, price, fees, and exchange rules.