Leverage in trading, including crypto trading, refers to the practice of using borrowed funds or margin to increase the potential profit or loss of a trade.
When a trader uses leverage, they are essentially borrowing money from the exchange or broker to increase their position size beyond what they could afford with their own capital. This amplifies the potential gains or losses of a trade, as even small price movements can have a significant impact on the borrowed amount.
For example, if a trader has $1,000 and uses 10x leverage, they can enter a position worth $10,000. If the price of the cryptocurrency they are trading increases by 10%, they would make a $1,000 profit, which is equivalent to a 100% return on their initial capital. However, if the price of the cryptocurrency goes down by 10%, they would lose $1,000, which is equivalent to losing all of their initial capital.
It is important to note that trading with leverage can be very risky, as losses can exceed the initial investment if the market moves against the trader. It is recommended that traders have a solid understanding of the risks and use risk management strategies, such as setting stop-loss orders, when trading with leverage.