What is leverage(Leverage)? Leverage means expanding trading capacity.

Basic Principles: Why Do Traders Use Leverage

Leverage in Thai translates to the use of borrowed power to control assets of enormous value. It is a tool that allows traders to control a larger amount of money in the market than their actual capital. According to financial definitions, leverage is the ability to use a small amount of capital to control a very large trading position. Brokers lend the remaining amount.

For example, if you want to control a trading position of $100,000, a broker might set aside only $1,000 from your account as (Margin) and borrow the rest. This scenario is expressed as a leverage ratio of 1:100, meaning you need to put up 1% of the trading position’s value as collateral.

Leverage Ratios and Required Margin

Generally, brokers offer a variety of leverage ratios from 1:1 (no leverage) up to 1:200 or higher. Some platforms offer leverage up to 1:500. The table below shows the relationship between leverage ratios and the percentage of margin required:

Practical Use: Impact on Your Account

Suppose you want to trade EUR/USD at a price of 1.26837 and decide to open a position of 1 lot (100,000 units). The total value of the position is 1.26837 × 100,000 = $126,837.

Scenario 1: Using 1:1 leverage (no leverage)

• Required margin: $126,837
• Trade volume: 1 lot (100,000)

Scenario 2: Using 1:200 leverage as recommended by the broker

• Required margin: $126,837 × 0.5% = $634.19
• Trade volume: 1 lot (100,000)

The difference is huge—you can control the same position with less than 200 times less capital!

Profit and Loss: Double-Edged Sword

Suppose the EUR/USD price increases by 3 pips from 1.26837 to 1.26867:

Profit = (1.26867 - 1.26837) × 100,000 = $130

From this example, you see that the dollar profit is the same, but the percentage return varies greatly.

Similarly, if the price drops by 3 pips from 1.26837 to 1.26807:

Loss = (1.26807 - 1.26837) × 100,000 = -$130

Loss is only $130 but when divided by the required margin $130 in the case of 1:200(, the loss equals 20.52% of your capital.

Why Is Leverage a “Double-Edged Sword”

Leverage can magnify your profits immensely, just as it can amplify your losses in the same way. It is a common analogy in the financial world that highlights the dangerous nature of using leverage recklessly.

Novice traders often get shocked by high profits and forget to consider the increased risks proportionally. Excessive leverage can lead to significant losses or even account closure with a rapid margin call.

Summary

Leverage means using borrowed money to expand your trading capacity. It is a powerful tool but comes with high risk. Traders can choose leverage ratios that suit their strategy and risk tolerance.

A proper understanding of how leverage works and mindful risk management are key to long-term trading success.