Definition
Leverage means controlling a position larger than your own capital by using borrowed funds or a margin deposit, so that gains and losses are multiplied relative to the money you put in.
How it works
The money you commit is called margin, and leverage = position size ÷ margin. With $1,000 of margin at 10x leverage, you control a $10,000 position. Every percentage price move is then multiplied: at 10x, a 1% move equals 10% of the margin, and a 5% move equals 50%. In crypto, leverage is most common on futures and perpetual contracts; stock and currency traders use margin accounts and other leveraged products.
The multiplication works the same way for losses. When losses use up most of the margin, the position is closed automatically, which is called liquidation, so a leveraged position can be wiped out by a move that would be modest for an unleveraged holding. Trading fees are charged on the full position size, not on the margin, and so are funding payments on perpetual contracts, so costs grow with leverage too.
Leverage does not change the price move needed for a profit; it changes how much that move adds to or takes from your capital. For this reason, many traders first decide the amount they are willing to lose and size the position from it, instead of starting from the maximum leverage on offer.
Example (hypothetical numbers)
Suppose you post $1,000 of margin and open a 10x long position worth $10,000 in Coin A at $50, which buys 200 coins.
If Coin A rises 3% to $51.50, profit = 200 × $1.50 = $300, which is 30% of the margin.
If Coin A falls 3% to $48.50, the loss is also $300, or 30% of the margin.
With a hypothetical fee of 0.05% per trade, opening and closing cost about 2 × $10,000 × 0.05% = $10, or 1% of the margin.
The example shows that leverage multiplies gains, losses and costs by the same factor.
Common mistakes
- Measuring a leveraged trade's result against the position size instead of the margin.
- Forgetting that fees and funding are charged on the full position size.
- Choosing the leverage first and working out the amount at risk afterwards.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.