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Leverage is the use of borrowed funds to increase one's trading position beyond what would be available from their cash balance alone. Forex traders often use leverage to profit from relatively small price changes in currency pairs. Leverage, however, can amplify both profits as well as losses.

For example, if you are required to deposit 1% of the total transaction value as margin and you intend to trade one standard lot of USD/CHF, which is equivalent to US$100,000, the margin required would be US$1,000. Thus, your margin-based leverage will be 100:1 (100,000/1,000). For a margin requirement of just 0.25%, the margin-based leverage will be 400:1, using the same formula.

Margin-Based Leverage Expressed as Ratio	Margin Required of Total Transaction Value
400:1	0.25%
200:1	0.50%
100:1	1.00%
50:1	2.00%

However, margin-based leverage does not necessarily affect risk, and whether a trader is required to put up 1% or 2% of the transaction value as margin may not influence their profits or losses. This is because the investor can always attribute more than the required margin for any position. This indicates that the real leverage, not margin-based leverage, is the stronger indicator of profit and loss.

To calculate the real leverage you are currently using, simply divide the total face value of your open positions by your trading capital:

For example, if you have $10,000 in your account, and you open a $100,000 position (which is equivalent to one standard lot), you will be trading with 10 times leverage on your account (100,000/10,000). If you trade two standard lots, which are worth $200,000 in face value with $10,000 in your account, then your leverage on the account is 20 times (200,000/10,000)

Traders may also calculate the level of margin that they should use. Suppose that you have $10,000 in your trading account and you decide to trade 10 mini USD/JPY lots. Each move of one pip in a mini account is worth approximately $1, but when trading 10 minis, each pip move is worth approximately $10. If you are trading 100 minis, then each pip move is worth about $100.

Thus, a stop-loss of 30 pips could represent a potential loss of $30 for a single mini lot, $300 for 10 mini lots, and $3,000 for 100 mini lots. Therefore, with a $10,000 account and a 3%maximum risk per trade, you should leverage only up to 30 mini lots even though you may have the ability to trade more.

Which markets can you use Leverage on?

Indices: An index is a numerical representation of the performance of a group of assets from a particular exchange, area, region or sector. As indices are not physical assets, they can only be traded via products that mirror their price movements – including CFD trading and ETFs.
Forex: Foreign exchange, or forex, is the buying and selling of currencies with the aim of making a profit. It is the most-traded financial market in the world. The relatively small movements involved in forex trading mean that many choose to trade using leverage.
Cryptocurrencies: Cryptocurrencies are virtual currencies that can be traded in the same way as forex, but are independent of banks and governments. Leveraged products allow traders to gain exposure to major cryptocurrencies, such as bitcoin and ethereum, without tying up lots of capital.

Advantage of using Leverage:

Magnified profits: You only have to put down a fraction of the value of your trade to receive the same profit as in a conventional trade. As profits are calculated using the full value of your position, margins can multiply your returns on successful trades – but also your losses on unsuccessful ones.
Gearing opportunities: Using leverage can free up capital that can be committed to other investments. The ability to increase the amount available for investment is known as gearing
Shorting the market: Using leveraged products to speculate on market movements enables you to benefit from markets that are falling, as well as those that are rising – this is known as going short
24-hour dealing: Though trading hours vary from market to market, certain markets – including key indices, forex and cryptocurrency markets – are available to trade around the clock

Disadvantage of using Leverage:

Magnified losses: Margins magnify losses as well as profits, and because your initial outlay is comparatively smaller than conventional trades, it is easy to forget the amount of capital you are placing at risk. So you should always consider your trade in terms of its full value and downside potential, and take steps to manage your risk
No shareholder privileges: When trading with leverage you give up the benefit of actually taking ownership of the asset. For instance, using leveraged products can have implications on dividend payments. Instead of receiving a dividend, the amount will usually be added or subtracted to your account, depending on whether your position is long or short
Margin calls: If your position moves against you, your provider may ask you to put up additional funds in order to keep your trade open. This is known as margin call, and you’ll either need to add capital or exit positions to reduce your total exposure
Funding charges: When using leverage you are effectively being lent the money to open the full position at the cost of your deposit. If you want to keep your position open overnight you will be charged a small fee to cover the costs of doing so

This table shows how the trading accounts of these two traders compare after the 100-pip loss.

	Trader A	Trader B
Trading Capital	$10,000	$10,000
Real Leverage Used	50 times	5 times
Total Value of Transaction	$500,000	$50,000
In the Case of a 100-Pip Loss	-$4,150	-$415
% Loss of Trading Capital	41.5%	4.15%
% of Trading Capital Remaining	58.5%	95.8%

What is Leverage?

Which markets can you use Leverage on?

Advantage of using Leverage:

Disadvantage of using Leverage: