What is leverage?
Leverage allows a trader to control a larger market position with a smaller amount of account capital.
Because leverage increases market exposure relative to account capital, both potential gains and potential losses can become larger relative to the funds committed.
What is margin?
Margin is the amount of account capital required to support a leveraged position.
Margin should not be confused with a trading fee. It represents capital allocated to support the position and may change as the position size or market price changes.
Understanding exposure
Exposure describes how much market risk a trading position represents. A trader can have significant exposure even when the amount of cash directly committed to a position appears relatively small.
Understanding exposure is therefore essential when using leveraged products.
Why leverage increases risk
A small market movement can have a much larger effect on account equity when a position is highly leveraged.
For this reason, leverage should be considered together with position size, stop-loss placement, available margin, and overall account risk.
Practical risk controls
- Understand the leverage available on the trading account.
- Know the margin requirements before opening a position.
- Monitor available margin and account equity.
- Avoid taking positions that create excessive exposure.
- Consider how unexpected volatility could affect the account.
Key takeaway
Leverage is a tool that increases market exposure. Understanding margin and exposure helps traders recognize how quickly market movements can affect their account.