Leverage trading is not that complicated: A clear explanation of margin matters

Do you want to control a trading position of 100,000 yuan with just 1,000 yuan? It sounds like a fairy tale, but that’s exactly the magic of leverage. However, before you get excited, you need to understand the true nature of this tool.

What exactly are leverage and margin?

Simply put, leverage is a way brokers lend you money. You don’t need to put up the full amount of the trade; you only need to pay a portion as “margin” (also called collateral), and you can control a trading size far exceeding your principal.

For example, if you want to make a $100,000 trade. If the broker offers 1:100 leverage, you only need to put up $1,000 as margin—that’s a 1% requirement. In other words, with 1,000 yuan, you control a position of 100,000 yuan.

Most brokers offer various leverage options from 1:1 up to 1:200 or even 1:500. The higher the leverage, the lower the required margin. Here’s a quick reference table:

Practical scenario: How leverage changes your returns?

Let’s take EUR/USD as an example. Suppose the price is 1.26837, and you decide to trade 1 lot (which equals 100,000 units).

Scenario A: No leverage (1:1)

• Required margin: $126,837
• You need to put up the full amount

Scenario B: Using 1:200 leverage

• Required margin: $126,837 × 0.5% = $634.19
• You only need to put up $634.19

The same trade requires vastly different capital. Now, suppose the price rises by 3 pips, from 1.26837 to 1.26867:

Profit without leverage: ((126,867 - 126,837)) ÷ 126,837 = 0.1%

Profit with 1:200 leverage: ((126,867 - 126,837)) ÷ 634.19 = 20%

Both profit $130, but the return rate differs by 200 times. Conversely, if the price drops by 3 pips, losses are amplified by the same multiple.

Why is leverage considered a double-edged sword?

The key lies in the “magnification effect.” Leverage not only amplifies your profits but also your losses. Using a small principal to control a large position sounds tempting, but the risks increase exponentially.

In the above example, just a 3-pip favorable move turns a 0.1% small gain into a 20% big gain. But what if the market moves against you? A 20% loss could wipe out one-fifth of your account.

That’s why industry insiders often say: Leverage is a double-edged sword for traders. High leverage means high risk. What seems like a low-cost entry can hide enormous principal erosion risks.

Quick key points

• The essence of leverage: Using borrowed funds to expand trading size
• Role of margin: Collateral for this “loan”
• Choice is yours: Brokers offer various leverage ratios, traders can choose freely
• Risk warning: Gains are amplified, losses are amplified—there’s no free lunch