Definition
Leverage is the ratio between a trading position and the capital or margin supporting it, allowing exposure larger than the posted amount.
How leverage changes exposure
A position with five times leverage has market exposure equal to five times the margin assigned at entry. A one percent price move therefore changes the position value by roughly five percent of that starting margin before fees, funding and other account effects.
Leverage magnifies losses as well as gains. Higher leverage leaves a smaller adverse price move before the account can fall below its maintenance requirement. The maximum available leverage and margin formula vary by market and venue.
Cross and isolated margin change the boundary
With isolated margin, one position uses a defined collateral amount. With cross margin, eligible account collateral can support several positions. Cross margin may delay one liquidation, but losses in one position can consume collateral supporting others.
What it does not mean
Leverage describes exposure relative to supporting capital. It is not borrowed cash delivered to the trader, and selecting lower leverage does not remove market risk.
Where this term fits
Questions about leverage
- Does leverage increase both gains and losses?
- Yes. It increases the effect of a price move on the margin supporting the position in either direction.
- Is leverage the same as margin?
- No. Margin is the capital supporting a position. Leverage compares the position exposure with that supporting capital.
- Does lower leverage prevent liquidation?
- No. It can provide more margin relative to the position, but losses, funding and other positions can still make an account liquidatable.
See these concepts in context
Review the Fensory MCP connection, tools and account controls.