Leverage lets a trader open a position worth more than the capital they put up. Expressed as a multiple such as 5x or 20x, it scales the size of exposure relative to the margin posted as collateral.
Because both profits and losses are calculated on the full position size, leverage magnifies outcomes in both directions. As an illustration, a position using 10x leverage experiences roughly ten times the percentage impact of the underlying move, so a 10% adverse move can exhaust the collateral and trigger liquidation.
Higher leverage reduces the cushion a position has before it is liquidated, which is why leverage and liquidation are closely linked. Leverage is a mechanism for sizing exposure, and the trade-off it introduces between amplified outcomes and reduced margin tolerance is a core concept in derivatives.