What leverage does
Leverage lets you open a position larger than the money in your account. It is written as a ratio:
- 1:30 - every $1 controls $30
- 1:100 - every $1 controls $100
- 1:500 - every $1 controls $500
Your broker effectively lends you the rest, and holds part of your balance as margin (Module 8).
Gains and losses grow together
You deposit $500 and open a $50,000 position on EUR/USD (0.5 lots), using 1:100 leverage.
| Price move | Result on $50,000 | Effect on your $500 |
|---|---|---|
| +0.5% | +$250 | +50% |
| −0.5% | −$250 | −50% |
| −1.0% | −$500 | −100% |
A half-percent move is an ordinary day for EUR/USD. Leverage turns it into half your account.
Maximum leverage vs effective leverage
The leverage your broker offers is a maximum. What matters is the effective leverage you actually use:
Effective leverage = total position value ÷ account equity
A $1,000 account with a 0.01-lot EUR/USD position (about $1,085 of exposure) has effective leverage of roughly 1:1, even if the account allows 1:500.
Why regulators restrict leverage
Several regulators limit retail leverage, for example to 1:30 on major pairs in the UK and EU, because high leverage is strongly linked to client losses. Offshore entities of the same brokers sometimes offer much higher leverage. Higher leverage is not a benefit if you do not need it.