Leverage lets you control a position larger than the money you deposit. It is the reason a small account can trade a standard lot, and the reason a small move can wipe out that account.
Leverage and margin
At 30:1 leverage, US$1,000 of your own money can control up to US$30,000 of currency. The money set aside to hold the position is called margin: margin = position value ÷ leverage.
| Position | Leverage | Margin needed |
|---|---|---|
| 1 standard lot EUR/USD at 1.10 (value US$110,000) | 30:1 | about US$3,667 |
| Same position | 100:1 | US$1,100 |
| Same position | 500:1 | US$220 |
Equity, free margin and margin level
- Equity is your balance plus or minus the profit or loss on open trades.
- Free margin is the equity not being used as margin, so it is what you have available to absorb losses or open new trades.
- Margin level is equity ÷ margin used, shown as a percentage. It falls when trades go against you.
Margin call and stop-out
When the margin level falls below a threshold, the broker warns you (a margin call). If it keeps falling, the broker starts closing positions automatically (a stop-out). Levels vary by broker and entity. Under UK and EU retail rules, positions must be closed when account equity falls to 50% of the required margin.
Why leverage magnifies losses
With a US$1,000 account and one standard lot of EUR/USD, each pip is worth about US$10, so a 100-pip move against you costs US$1,000, the whole account. With 0.10 lots the same move costs about US$100. The leverage available did not change; the position you chose did.
Regulatory limits
UK and EU rules cap retail leverage at 30:1 on major currency pairs, 20:1 on other pairs, gold and major indices, 10:1 on other commodities, 5:1 on shares and 2:1 on crypto. Australia’s ASIC applies similar caps to retail clients, including 30:1 on major pairs. Some offshore entities advertise far higher ratios: several brokers in our reviews list up to 1:500, 1:1000 or 1:2000. Higher leverage is a marketing feature, not a safety feature.
Key takeaway
Judge your risk by your position size and stop distance, not by the maximum leverage on offer. Effective leverage (position value ÷ account equity) is a better guide, and many cautious traders keep it low.
General information for education only, not financial advice. Trading forex and CFDs carries a high risk of loss. Read the disclaimer.