In forex, stocks and crypto trading, leverage enables traders to control larger positions with a fraction of their own capital. It’s expressed as a ratio (e.g., 50:1, 100:1), indicating how much larger a position can be relative to the trader’s deposited funds. For instance, with a leverage ratio of 100:1, a trader can control a position worth $100,000 with just $1,000 in their account.

While leverage offers the potential for greater profits from small price movements, it also increases the risk of significant losses. Even a slight adverse price change can lead to losses that exceed the initial investment. To manage this risk, traders often use stop-loss orders to automatically exit trades if the market moves against them beyond a certain point.

It’s crucial for traders to understand leverage fully before using it. Regulations in different countries often limit the maximum leverage that brokers can offer to protect traders from excessive risk. Using leverage effectively requires careful risk management and a disciplined trading approach to ensure that potential losses are controlled while aiming to capitalize on market opportunities.