Lesson 04 of 8 · Forex Foundations
22 min4 topics
Topic 1 of 4
Leverage is the single most misunderstood thing in retail trading, and the misunderstanding is expensive. It does not decide how much you can lose. It decides how much of your money is tied up while you find out.
Leverage is written as a ratio: 1:100, 1:500. It says how large a position your broker will let you hold against a given deposit. At 1:100, one dollar of margin supports a hundred dollars of position.
What it is not is a setting that makes a trade riskier. Your risk comes from two numbers you choose yourself: how big the position is, and how far away your stop is. Leverage does not appear in that calculation anywhere.
Good to know
Two traders with the same 0.10 lot position and the same 30-pip stop are risking exactly the same $30, whether one is on 1:30 and the other on 1:500. The only difference is how much of their balance is held aside while the trade is open.
Required margin is the deposit your broker holds against an open position. It is not a fee and it is not spent — it is returned when the position closes.
What each variable means:
One standard lot of EUR/USD at 1.0800 is a notional position of $108,000. What that ties up depends entirely on the leverage:
| Leverage | Margin required | Share of the position |
|---|---|---|
| 1:30 | $3,600 | 3.3% |
| 1:100 | $1,080 | 1% |
| 1:500 | $216 | 0.2% |
Free margin is what is left: your equity minus the margin currently held. It is the cushion a losing position eats into, and the room you have to open anything else.
Brokers watch one number to decide whether you are still good for your positions.
What each variable means:
Equity falls as a position moves against you, so the margin level falls with it. Two thresholds then matter, and both are set by your broker rather than by any rule of the market:
Caution
A stop out is not a safety net. It fires on the broker's schedule, at whatever price is available, and it can happen in a fast market before any stop loss of yours is reached. If your plan depends on being stopped out, you do not have a plan.
High leverage does not force anyone to lose money. It removes the thing that used to stop them: on a small account at low leverage, an oversized position is simply refused for want of margin. At 1:500 the same position is allowed, and a bad idea becomes possible rather than impossible.
Take a $1,000 account. At 1:500 the margin on one standard lot of EUR/USD is $216, so the trade goes through. One standard lot is $10 a pip — a 20-pip move against you is $200, a fifth of the account, on a move that happens most days before lunch.
The position was never the right size. Leverage only declined to say so.
Try it now
Put a position and a leverage into the margin calculator to see what it ties up, and use the leverage calculator to check what a given position implies about your account.
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