What is leverage in trading? The three numbers called leverage

CoTrading editorial team 2026-09-23

Leverage is the ratio of a position’s market exposure to the capital backing it: notional value divided by margin or equity. At 5× leverage, a 1% move in price is roughly a 5% change in the capital behind the position.

That definition is simple. The difficulty is that trading screens use the word for at least three different ratios, which can differ several times over on the same position. This page defines each, works through how they are computed, and shows the property that surprises people most: leverage is not fixed when you set it — it drifts, and it drifts toward you when you are losing.

For the argument about what leverage does and does not do to risk, see leverage is not risk. This page is the mechanics underneath it.

Why this matters now

Derivatives venues ask you to pick a leverage number before you trade, which makes it feel like the primary decision. It is the least informative of the three leverage figures, and the one people quote. “I trade at 20×” can describe an account with 3× exposure; “I only use 3×” can describe an account where a 10% move is a 30% loss.

How it actually works

The general form is always the same:

leverage = exposure ÷ capital backing it

What changes is which capital you divide by.

The leverage setting. A per-position or per-symbol choice on the venue. It sets the initial margin rate as 1 ÷ leverage and is capped by the venue, with lower caps for larger positions. It is a collateral instruction, not a measure of exposure.
Position leverage. position notional ÷ margin posted to it. Under isolated margin, at entry, it equals the setting. It changes if you add or remove margin, or as unrealised profit and loss move the position’s equity. This is the figure that decides liquidation distance.
Account leverage. total notional ÷ account equity. This is the one that describes what a market move does to your money.

An illustrative account of 10,000 opens a long of 0.5 units at 60,000 — 30,000 of notional — with the setting at 20× on isolated margin:

Figure	Calculation	Value
Leverage setting	chosen	20×
Margin posted	30,000 ÷ 20	1,500
Position leverage	30,000 ÷ 1,500	20×
Account leverage	30,000 ÷ 10,000	3×

Twenty and three, on one position. The liquidation price is governed by the 20×. What a 10% move does to the account is governed by the 3×.

What leverage multiplies

At the account level, for small moves:

change in equity ≈ account leverage × price change

At 3×, a 1% move is about 3% of equity; a 10% move against you is about 30%. At 5×, the same 10% is about 50%. This is the multiplication the definition promises, and it is symmetric in percentage terms for a single move.

It is not symmetric over a sequence, for two reasons: losses raise leverage (next section), and a constant-leverage position compounds its swings unevenly — see volatility drag.

Leverage drifts, and toward you when you lose

Account leverage is computed on current notional and current equity. Both move with price, and they move in the direction that hurts.

Same account, 30,000 of exposure on 10,000 of equity (3×), no further orders:

Price move	Long: equity	Long: leverage	Short: equity	Short: leverage
−20%	4,000	6.00×	16,000	1.50×
−10%	7,000	3.86×	13,000	2.08×
0%	10,000	3.00×	10,000	3.00×
+10%	13,000	2.54×	7,000	4.71×

Read the losing side of each column. The long at −10% is at 3.86×; the short at +10% is at 4.71×. A losing position is a more leveraged position, and the next percent against you costs more than the last one did. The short is worse because its notional grows while its equity shrinks — both terms move the ratio the same way.

The same effect is sharper on a single highly leveraged position. A 10× long — 10,000 of notional on 1,000 of equity — after a 5% fall is 9,500 on 500: 19×. That is the path to liquidation, seen from the leverage side rather than the price side.

The winning side is the mirror image: leverage falls as you win. A position held at a “constant” leverage has to be added to as it wins and cut as it loses — buying after rises and selling after falls — which is exactly the rebalancing that produces volatility drag.

Leverage vs margin vs borrowing

The terms get used interchangeably, and they are not.

Term	What it is
Leverage	A ratio — exposure over capital
Margin	The collateral posted to support leveraged exposure
Borrowing	One way to obtain leverage: a loan of cash or an asset, with interest

On spot margin you actually borrow — cash to buy more, or the asset to sell short — and pay interest on the loan. On futures and perpetuals nothing is borrowed: the contract gives you exposure to price and you post margin against it. The cost of holding a perpetual shows up as funding rather than interest, charged on notional — the funding rate calculator computes it.

Both produce the same multiplication. They fail differently: a margin loan accrues interest whether or not the market moves, while funding changes sign and size with positioning.

Where the boundary should sit

Leverage should be an output of sizing, not an input. The order that keeps the three numbers honest:

Size from the stop. Risk amount ÷ stop distance gives the quantity; the position size calculator does it.
Read account leverage off the result. Total notional ÷ equity. If that number surprises you, the sizing is what to revisit, not the setting.
Set the leverage setting so liquidation sits beyond the stop. The ceiling is roughly 1 ÷ (stop distance + maintenance margin rate) — max leverage for your stop distance derives it, and the leverage and stop-loss table looks it up.
Re-read account leverage after adverse moves. It is higher than when you opened, before any decision of yours.

FAQ

What does 10x leverage mean?

That the position’s exposure is ten times the capital backing it: 10,000 of notional on 1,000 of margin. A 1% price move changes that capital by about 10%, and an adverse move of roughly 10% minus the maintenance margin rate reaches liquidation. It says nothing about how much of your whole account is at risk.

What is the difference between the leverage setting and actual leverage?

The setting is a collateral instruction: it fixes the initial margin posted for a position as notional divided by leverage. Actual, account-level leverage is total notional divided by account equity. A 20× setting on a position whose notional is three times the account’s equity is 3× account leverage.

Does leverage stay the same while a position is open?

No. Leverage is computed on current notional and current equity, and both move with price. A losing position becomes more leveraged — a 3× long after a 10% fall is about 3.9×, a 3× short after a 10% rise about 4.7× — and a winning one becomes less leveraged, without any order being placed.

Is leverage the same as borrowing?

Not on futures and perpetuals. Spot margin trading borrows cash or an asset and charges interest on the loan. Derivatives give exposure to price through the contract itself, with margin posted as collateral and, on perpetuals, funding payments in place of interest. Both multiply exposure relative to capital.