Understanding Leverage and Margin in Trading
Leverage amplifies both profits and losses. Understanding how margin works is critical to avoiding account blowups.
Basics · May 22, 2026 · 5 min read
Leverage lets you control a larger position than your account balance would otherwise allow. With 10:1 leverage, $1,000 controls $10,000 of an asset. If that asset rises 1%, you earn $100 — a 10% return on your $1,000. But if it drops 1%, you lose $100, also a 10% return against you. Leverage multiplies both gains and losses equally.
What Is Margin?
Margin is the collateral your broker holds to cover potential losses on your leveraged position. If you have a $10,000 position with 10:1 leverage, your broker requires $1,000 in margin. Your remaining account balance is free margin. If your losses reduce your equity below the maintenance margin level, you receive a margin call — your broker may automatically close positions to protect themselves.
Using Leverage Safely
Professional traders rarely use maximum available leverage. The key is ensuring your position size and stop loss combination never risks more than 1–2% of your account on any single trade, regardless of the leverage available to you. High leverage allows smaller accounts to trade, but it also compresses the margin for error. A 10% adverse move with 10:1 leverage wipes your margin entirely.
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