What is leverage
Leverage is a tool that allows you to trade a larger amount of money than you actually have in your trading account. In practice, it works by allowing your broker to let you open a larger trade than your own capital would otherwise allow. However, you are still trading with your own money and you bear all the risk.
For example, if you use leverage of 1:30, it means that with 1 dollar you can control a trade worth 30 dollars. So if you deposit 100 USD, you can open a trade worth 3,000 USD.
However, it is very important to understand that leverage magnifies not only potential profits, but also potential losses. It must therefore be used carefully.
Why leverage is used
Leverage allows people who do not have a large amount of capital to trade. It can help you profit even from smaller market movements. At the same time, the higher the leverage you use, the greater the risk of loss.
Practical examples of using leverage
The principle of leverage is the same regardless of the underlying asset. An underlying asset means the asset on which the trade is based, in other words the price you are actually trading, such as shares, currencies, gold, indices or cryptocurrencies.
Example of trading the EUR/USD currency pair with 1:30 leverage
Imagine that you want to trade the EUR/USD currency pair. You decide to open a trade with capital of 100 USD and your broker allows you to use leverage of 1:30.
Thanks to this leverage, you can open a trade worth 3,000 USD. In other words, you control a trade thirty times larger than your deposit.
If the EUR/USD exchange rate rose by 1%, the value of your trade would increase by 30 USD. This means your account would rise from 100 USD to 130 USD. You would therefore make 30% on your capital.
Losses work in exactly the same way. If the market fell by 1%, you would lose 30 USD. Your account would therefore fall to 70 USD.
Example of trading BTC/USD with 1:2 leverage
Cryptocurrencies are highly volatile, which is why the maximum permitted leverage for them in the EU is lower. Let us explain this using Bitcoin as an example.
You decide to trade BTC/USD with capital of 100 USD and use leverage of 1:2. This allows you to open a trade worth 200 USD.
If the price of Bitcoin rises by 5%, the value of the trade increases by 10 USD. Your account therefore rises to 110 USD.
If, however, Bitcoin fell by 5%, you would lose 10 USD and you would have 90 USD left in your account.
Example of trading gold with 1:20 leverage
Gold is one of the most popular commodities. Imagine that you want to trade gold and use capital of 100 USD with leverage of 1:20.
This allows you to open a trade worth 2,000 USD. If the price of gold rose by 2%, you would make 40 USD. Your account would therefore rise to 140 USD.
If the price of gold fell by 2%, you would lose 40 USD and your account would fall to 60 USD.
Leverage limits for regulated brokers in the EU
In the European Union, leverage is regulated to protect ordinary traders from excessive risk. These limits apply to retail traders, meaning most broker clients.
| Asset | Maximum leverage |
|---|---|
| Forex (currency pairs) | 1:30 for major currency pairs, 1:20 for others |
| Indices | 1:20 |
| Commodities | 1:20 for gold, 1:10 for others |
| Cryptocurrencies | 1:2 |
| Shares | 1:5 |
| ETF | 1:5 |
Can traders access higher leverage?
Yes, they can. If you meet your broker’s conditions, you can obtain what is known as professional status. Professional clients can trade with higher leverage even in the European Union.
How to become a professional client
Professional status is obtained by completing an investment questionnaire with your broker. In it, the broker checks your knowledge, experience and financial situation. The aim is to determine whether you understand the risks of trading. The broker usually assesses several areas. For example, it looks at your trading experience, meaning how long you have been trading, which instruments you have traded and how often you place trades.
The size of your investment portfolio is also assessed. Another factor may be professional experience in the financial sector. If you have worked in finance, investing or trading, for example, this may be an advantage. Usually, you need to meet at least two of these conditions.
Warning about the risks of leverage
Leverage is a very powerful tool. It helps increase profits, but it can also increase losses quickly. It is therefore important to use it carefully and always think about risk management. A simple rule applies: the higher the leverage, the higher the risk.
Summary
Leverage allows you to trade larger volumes with less capital. In forex, you can use leverage of up to 1:30 as a retail client, 1:20 for gold and 1:2 for cryptocurrencies. If you meet your broker’s conditions and obtain professional status, you can also trade with higher leverage.
The most important thing is always to trade responsibly and understand the risks that leverage involves.