Leverage

In detail

Leverage is expressed as a ratio such as 1:10, 1:30 or 1:100. It tells you how large a position you can open relative to the margin you put up. At 1:30, every $1 of margin supports $30 of market exposure.

Margin and leverage are two views of the same thing:

Margin required = position value ÷ leverage

So 1:30 leverage means a 3.33% margin requirement, 1:50 means 2%, and 1:100 means 1%.

Maximum vs effective leverage

The ratio your broker offers is the maximum available. What really matters is the effective leverage you use:

Effective leverage = total position value ÷ account equity

A trader with $10,000 who opens a $20,000 position is using 2:1 effective leverage, even if the account permits 1:500.

Example

Assume (illustratively) two traders each have $5,000 and EUR/USD is at 1.1000.

• Trader A buys 0.1 lots (10,000 EUR = $11,000 notional). Effective leverage is about 2.2:1.
• Trader B buys 1 lot (100,000 EUR = $110,000 notional). Effective leverage is 22:1.

EUR/USD falls 100 pips to 1.0900.

• Trader A loses 100 × $1 = $100, or 2% of the account.
• Trader B loses 100 × $10 = $1,000, or 20% of the account.

The market move was identical. Leverage alone decided the impact.

Regulation

Many regulators cap retail leverage. For example, in the EU and UK, retail clients are generally limited to 1:30 on major currency pairs and lower ratios on other instruments. Limits elsewhere vary, so check the rules that apply to your account.

Why it matters

Leverage is not a measure of skill or profit potential; it is a measure of how quickly gains and losses accumulate. High effective leverage shortens the distance to a margin call. Most risk-conscious traders size positions based on how much they are willing to lose per trade, then let leverage follow from that, rather than the other way around. Try the Leverage Calculator to see the effect on your own numbers.