Leverage is a basic but powerful tool traders use in the forex market to control a position larger than the money they actually put up. In simple terms, leverage lets you use a relatively small amount of capital—called margin—to gain exposure to a much bigger trade. That extra exposure can increase the size of both profits and losses, so it’s important to understand exactly how leverage works before you use it. This article explains the concept in plain language, shows a few worked examples, and describes the practical risks and common ways traders manage them.
Leverage and margin: the difference explained
People often use the words “leverage” and “margin” interchangeably, but they refer to two linked concepts. Leverage is the ratio that tells you how much market exposure you control for each dollar of your own money. Margin is the actual cash you must hold in your account to open and maintain that leveraged position.
Think of leverage as the amplifier and margin as the deposit that activates it. If a broker offers 100:1 leverage, that means you can control 100 times your margin. If you open a trade worth $100,000 with 100:1 leverage, the broker will require a 1% margin ($1,000) to hold that position.
A useful way to convert between the two is: margin percentage = 1 / leverage ratio. So 50:1 leverage equals 2% margin, 20:1 equals 5% margin, and so on.
How leverage changes gains and losses — an example
Concrete examples make the effect of leverage easier to see. Suppose you have $1,000 in your trading account and you choose 100:1 leverage. With that leverage you could control a position worth $100,000. Many retail traders use “lots” to describe size; one standard lot is 100,000 currency units. On a standard lot of EUR/USD, one pip (the smallest quoted move for many pairs) is roughly $10.
If the market moves 50 pips in your favor, your position would gain about $500. On a $1,000 margin that is a 50% return. But if the market moves 50 pips against you, you would lose $500 — half your account — and a further adverse move could bring you to a margin call or forced close-out. That demonstrates why leverage is often called a double-edged sword: the same multiplier that magnifies gains also magnifies losses.
How brokers set leverage and margin requirements
Brokers set the maximum leverage they offer, and regulators in some regions also place limits. The broker’s margin requirement tells you how much of the notional trade value you must put up. Brokers often lower available leverage on volatile or exotic currency pairs, and they may raise margin requirements around major economic events to protect against rapid price swings.
Two common ways brokers express this are the leverage ratio (for example, 50:1 or 100:1) and the margin percentage (for example, 2% or 1%). You can calculate required margin with a simple formula: required margin = trade notional / leverage. So for a $50,000 trade with 50:1 leverage you need $1,000 of margin.
Margin calls and forced liquidation
When your open positions generate losses, your account equity (balance plus unrealized profit or minus unrealized loss) falls. If equity falls below the broker’s required maintenance margin, the broker will issue a margin call or start closing positions to prevent further losses. Margin calls can be automatic and fast in fast-moving markets. If your positions are closed automatically, you may not be able to re-enter at the same price even if the market later moves in your favour.
Some brokers offer negative-balance protection to prevent losses larger than your account, while others do not. Always check your broker’s terms so you know how margin calls and balance deficits are handled.
Costs of using leverage
Leverage doesn’t come free. The visible costs of a trade include spreads (the difference between buy and sell prices) or commissions. If you hold leveraged positions overnight you will usually face financing charges (rollover or swap fees) that reflect interest-rate differentials between the two currencies. These overnight costs can add up for longer-term positions and turn otherwise profitable trades into losers if not accounted for.
Practical tips for using leverage safely
Using leverage responsibly is more about position sizing and risk control than about the ratio itself. An experienced trader might use the same leverage but scale position sizes so that any single trade only risks a small percentage of the account. Many traders follow rules like risking 1% or 2% of account equity on any single trade; that way a series of losing trades is less likely to wipe out the account. Other risk controls include placing stop-loss orders to limit downside, keeping a clear plan for entries and exits, and avoiding excessive leverage on volatile instruments or around major news events.
Position sizing and stop-loss levels are the levers you can adjust to control the actual dollar risk of a trade. For example, instead of aiming to control a full standard lot with 100:1 leverage when your account is small, you could trade micro or mini lots so a 50-pip move doesn’t translate into a catastrophic loss.
Risks and caveats
Trading with leverage increases exposure and therefore increases risk. Even small price moves can have outsized effects on account equity when leverage is high. Rapid market moves, low liquidity, and slippage can lead to worse-than-expected execution and larger losses. Brokers may change margin requirements at short notice, and regulatory limits in your jurisdiction may restrict the leverage you can use. Overnight financing and swap rates can erode returns on positions held for more than a day. Finally, the psychological pressure of large leveraged positions can lead to poor decision-making — trading while emotional is a common cause of losses.
This article is educational and not personal financial advice. Trading carries risk and you should only trade with money you can afford to lose. Consider practicing on a demo account and learning position-sizing techniques before using leverage with real capital.
Key takeaways
- Leverage lets you control a larger market position with a smaller cash deposit (margin), amplifying both profits and losses.
- Leverage ratios and margin requirements are inverses: higher leverage means lower margin percentage and greater exposure.
- Manage leverage through position sizing, stop-losses, and limiting the percentage of account equity risked per trade.
- Trading carries risk; this information is educational only and not personalised advice.
References
- https://hycm.com/en/blog/terminologies/leverage
- https://www.investopedia.com/ask/answers/06/forexleverage.asp
- https://tastytrade.com/learn/trading-products/forex/what-is-leverage-forex-trading/
- https://www.babypips.com/learn/forex/leverage-defined
- https://www.forex.com/en-us/trading-academy/courses/how-to-trade/introduction-to-leverage/
- https://www.oanda.com/us-en/learn/introduction-to-leverage-trading/what-is-leverage-trading/