What Is Leverage? Definition & Example

Leverage is the ratio between the size of a position and the margin backing it. Post $500 against a $10,000 position and you are trading at 20x — the exchange effectively fronts the other $9,500, and your $500 is the buffer that absorbs any losses.

The most persistent misconception is that leverage multiplies your losses. It does not. If you hold a $10,000 position and price moves 2% against you, you lose $200 — at 5x, at 20x, at 100x. The dollar loss depends on position size and price movement, and leverage changes neither.

What leverage changes is how much of your margin that loss represents. At 5x you posted $2,000, so $200 is a 10% dent. At 20x you posted $500, so it is 40%. At 100x you posted $100 — the loss is twice your collateral, and you were liquidated long before reaching it. Higher leverage does not make you lose faster per point of movement; it makes you run out of room sooner.

The number most traders should actually watch is effective leverage: total notional across every open position divided by account equity. Three positions at "only 5x each" — $10,000 notional apiece on a $2,000 account — is $30,000 against $2,000, or 15x effective. In cross-margin mode those positions all share one collateral pool, so each one pulls the others toward liquidation.

Choose leverage by working backwards. Decide the stop first, then pick the highest leverage that still leaves liquidation comfortably beyond it. Setting leverage first and discovering afterwards where liquidation landed is the single most common way that correct trades get closed by the exchange.