What Is Leverage in Trading and How Does It Work?
Leverage is a tool that allows traders to control a position larger than their actual capital by using borrowed funds from a broker. It is expressed as a ratio — for example, 500:1 — which means a trader can control a position worth 500 times their deposited margin. A deposit of USD 200 at 500:1 leverage gives market exposure of USD 100,000.
How Leverage Works in Practice
When you open a leveraged position, your broker sets aside a portion of your funds as margin — a good-faith deposit to cover potential losses. The rest of the position is funded by the broker. Your profit or loss is calculated on the full position size, not just your margin.
| Leverage Ratio | Margin Required | Position Size Controlled | 1% Market Move = Gain/Loss |
|---|---|---|---|
| 50:1 | USD 2,000 | USD 100,000 | USD 1,000 |
| 200:1 | USD 500 | USD 100,000 | USD 1,000 |
| 500:1 | USD 200 | USD 100,000 | USD 1,000 |
What Does Leverage Mean for Profit and Loss?
Leverage amplifies both gains and losses in equal measures. A 1% favourable move on a USD 100,000 position generates USD 1,000 in profit — regardless of whether your margin was USD 200 or USD 2,000. Equally, a 1% adverse move produces the same USD 1,000 loss. At higher leverage, your margin can be wiped out by a relatively small market move.
Leverage: What to Keep in Mind
As a precaution, leverage is one of the most significant sources of loss for retail traders. While it magnifies the potential for profit, it magnifies the potential for loss by exactly the same degree. Always use stop losses to define your maximum risk per trade and never commit more margin than you can afford to lose entirely.
Experience Leverage in a Live Market
Leverage is a core feature of CFD trading — understanding it fully before you use it is essential. Create your live VT Markets account or log in now to access competitive leverage ratios across forex, indices, commodities, and more.
Risk Warning:Trading CFDs involves significant risk and may not be suitable for all investors. Losses can exceed your initial deposit. Please ensure you fully understand the risks involved before trading.
