Leverage refers to the use of borrowed capital to increase the potential return of an investment. In trading, it allows individuals to open larger positions than their actual account balance would permit. While leverage magnifies profits, it also increases the risk of losses, especially in volatile markets like Forex or Commodities. Traders must manage leverage carefully using stop-loss orders and proper risk management. Regulators often set maximum leverage limits to protect retail investors from excessive risk exposure and rapid account depletion.
Example:
For example, with 1:100 leverage, a trader can control a $10,000 position with just $100.
