Leverage and margin: what leverage in trading means

What does leverage mean in trading?

Leverage trading means controlling a position with a deposit worth a fraction of it. The ratio 1:30 says the position can be 30 times the margin; 1:500 says 500 times.

The broker does not lend you cash in the way a bank does. It holds back margin from your balance and settles the gain or loss on the whole position. A 1% move on a 1:30 position equals 30% of the margin, in either direction.

The leverage you actually use is total position value ÷ equity. One 0.05 lot EUR/USD trade (about USD 5,500) on a USD 1,000 account is 5.5:1, whatever maximum the account allows.

What is margin trading, and how margin is calculated

Margin trading is trading with borrowed exposure against a deposit. Required margin = position value ÷ leverage, in the account currency. One lot of EUR/USD at 1.1000 is 100,000 euros, worth USD 110,000.

What is a margin call in trading?

Margin level = equity ÷ used margin × 100%. Equity is your balance plus open profit or minus open loss. A margin call is the broker’s warning that the level has fallen to its threshold; the threshold is set by each broker, so check its terms.

Under FCA and ESMA rules, and ASIC’s order in Australia, a retail account is closed out when equity falls to 50% of the initial margin of its open positions. Worked example: you deposit USD 5,000 and buy one lot of EUR/USD at 1.1000 with 1:30 leverage. Used margin is USD 3,666.67 and the margin level starts at 136%. Close-out comes at equity of USD 1,833.33, after a loss of USD 3,166.67, or about 317 pips.

• Add funds or close part of the position before close-out, not after.
• A stop-loss closes the trade at your price; a close-out closes it at the broker’s.
• Negative balance protection for retail clients of Tier 1 companies caps the loss at your account balance.

Why 1:30: retail leverage caps

FCA policy statement PS19/18 sets the maximum leverage a firm may give a UK retail client when a position is opened: 1:30 on major pairs, 1:20 on other pairs, gold and major indices, 1:10 on other commodities and indices, 1:5 on shares. Crypto derivatives may not be sold to UK retail clients at all. ASIC applies the same ratios to the first four classes in Australia.

19 brokers in our data have a Tier 1 company that takes retail clients. Professional clients can get more: Tickmill’s CySEC company, for example, publishes “1:30 (retail, maximum and default); professional 1:500”. Professional status also removes negative balance protection.

Forex brokers with the highest leverage: what 1:500 means

The highest leverage in our data comes from offshore companies. Exness’s Seychelles company publishes “1:Unlimited if eligible (equity < 5,000 USD); 1:2000 by default; 1:1000 / 1:500 at higher equity”; Exness does not open retail accounts for UK or EEA residents. Brands that also hold Tier 1 licences publish different caps for the same products depending on the company:

Figures are copied from the brokers’ own pages; they show what each broker publishes, not a result of our own trading.

1:100 vs 1:500 leverage on the same trade

With USD 1,000 in the account and one 0.1 lot EUR/USD trade (USD 11,000), margin is USD 110 at 1:100 and USD 22 at 1:500. The pip value is USD 1 in both cases: a 100-pip loss costs USD 100 either way. The difference is how large a position the account lets you open. At 1:500 the same USD 1,000 can hold 4.5 lots, and then a 22-pip move against you costs about USD 990.