What is Leverage?
Leverage is borrowed capital that allows you to control a larger position than your actual deposit. Think of it as a loan from your broker that amplifies your buying power.
Simple Definition
1:100 leverage means for every $1 you deposit, you can control $100 in the market.
With $1,000 in your account and 1:100 leverage, you can open positions worth up to $100,000.
Why Does Leverage Exist?
Currency prices move in tiny increments. A 1% move in EUR/USD is considered HUGE. Without leverage, you'd need massive capital to make meaningful profits from these small movements.
Without Leverage vs With Leverage
❌ Without Leverage
You have: $1,000
EUR/USD moves: +1% (100 pips)
Your profit: $10
Not worth the effort
✓ With 1:100 Leverage
You have: $1,000
You control: $100,000
EUR/USD moves: +1% (100 pips)
Your profit: $1,000 (100%)
Now we're talking
⚠️ The Catch You Knew Was Coming
That same 1:100 leverage that turned $10 profit into $1,000 will also turn a $10 loss into a $1,000 loss. Leverage doesn't care which direction the price moves.
How Leverage Actually Works
Let's break down the mechanics with real numbers.
Detailed Example: Trading EUR/USD with 1:100 Leverage
📈 Scenario A: Price Goes UP
EUR/USD moves from 1.0850 to 1.0900 (+50 pips)
Profit = 50 pips × $10/pip = +$500
Return on margin = 50% 🎉
Return on account = 10%
📉 Scenario B: Price Goes DOWN
EUR/USD moves from 1.0850 to 1.0800 (-50 pips)
Loss = 50 pips × $10/pip = -$500
Loss on margin = 50% 😰
Loss on account = 10%
Key Insight: The leverage (1:100) allowed you to control $100,000 with only $1,000 margin. But your profit/loss is calculated on the full $100,000 position - not your $1,000 margin.
Common Leverage Ratios
| Leverage | Margin Required | $1,000 Controls | Risk Level | Who Uses It |
|---|---|---|---|---|
| 1:10 | 10% | $10,000 | Low | Conservative traders, US stocks |
| 1:30 | 3.33% | $30,000 | Low-Medium | EU retail traders (max allowed) |
| 1:50 | 2% | $50,000 | Medium | US forex traders (max allowed) |
| 1:100 | 1% | $100,000 | High | Offshore brokers, experienced traders |
| 1:500 | 0.2% | $500,000 | Extreme | Gamblers, account killers |
| 1:1000 | 0.1% | $1,000,000 | Suicidal | Nobody should use this |
Margin: The Deposit Behind Leverage
Margin is the deposit required to open and maintain a leveraged position. Think of it as collateral that the broker holds while your trade is open.
Key Margin Terms
Required Margin
The minimum amount needed to open a position.
$100,000 position ÷ 100 = $1,000 margin
Used Margin
Total margin currently tied up in open positions.
If you have 3 trades open, used margin = sum of all required margins.
Free Margin
Money available to open new positions.
Also called "available margin"
Margin Level %
Health indicator of your account.
Below 100% = Danger zone
Margin Call & Stop Out
These are the two levels that protect brokers (not you) from losses:
Margin Call (Usually 100%)
When your margin level drops to this point, you get a warning. You can't open new positions, but existing trades stay open.
Action: Deposit more funds or close losing positions.
Stop Out (Usually 20-50%)
When margin level drops here, the broker automatically closes your positions, starting with the biggest loser. This is forced liquidation.
Result: You lose most of your account. Game over.
Real Example: How Accounts Get Blown
Account: $2,000 | Open 2 lots EUR/USD | Used margin: $2,000
Margin level: 100%
Already at margin call level!
EUR/USD drops 30 pips | Loss: $600
Equity: $1,400 | Margin level: 70%
Approaching stop out
EUR/USD drops another 50 pips | Loss: $1,000 more
Equity: $400 | Margin level: 20%
STOP OUT - Positions forcibly closed
Final account balance: $400
Lost 80% of account in 2 hours because of over-leveraging.
Why High Leverage is Dangerous
Brokers advertise high leverage like it's a feature. It's not. It's a trap.
The Math of Account Destruction
| Leverage | Position Value | Move to Wipe Account | That's Just... |
|---|---|---|---|
| 1:10 | $10,000 | 1,000 pips (10%) | Major market event |
| 1:50 | $50,000 | 200 pips (2%) | Bad day |
| 1:100 | $100,000 | 100 pips (1%) | Normal volatility |
| 1:500 | $500,000 | 20 pips (0.2%) | Random noise |
| 1:1000 | $1,000,000 | 10 pips (0.1%) | One candle |
💀 The Deadly Reality
With 1:500 leverage and a $1,000 account trading max position, a 20-pip move against you wipes your entire account. EUR/USD moves 20 pips in minutes, sometimes seconds.
Why Brokers Offer Crazy Leverage
Simple: They make money when you trade.
- Higher leverage = You can open bigger positions
- Bigger positions = More spread revenue for broker
- You lose faster = You deposit more trying to recover
- Win for broker, lose for you
Offshore brokers offering 1:1000 leverage aren't doing you a favor. They're setting a trap.
The "I'll Just Use Less" Myth
"I have 1:500 leverage but I only use a little of it." - Famous last words.
🤔 The Plan
"I'll be disciplined. I'll only risk 1% per trade even though I have high leverage available."
😈 The Reality
After 3 losses in a row:
"Just one bigger trade to recover..."
After that fails:
"Maybe if I double down..."
Account: Gone.
High leverage availability is like having a loaded gun on your desk. Even if you don't plan to use it, in a moment of emotion, you might.
What's Actually Safe?
The question isn't "what leverage is available" but "what leverage should I use?"
🎯 BrokerMat Recommended Leverage
Beginners
Until you're profitable for 6+ months
Intermediate
With proven track record and discipline
Advanced
For specific strategies, with strict risk rules
Professional traders often use 1:10 or less. They don't need high leverage because they have larger capital. The biggest accounts in the world trade with low leverage.
How to Calculate Safe Position Size
Forget about leverage ratios. Focus on this instead:
Then calculate your position size based on stop loss distance (covered in Chapter 4).
If your proper position size requires more than 1:20 leverage, either:
- Use a wider stop loss
- Trade a smaller position
- Skip the trade entirely
💡 Pro Tip: Effective Leverage
Effective leverage = Total position value ÷ Account equity
If you have $10,000 and open a $50,000 position, your effective leverage is 1:5 - regardless of what your broker offers.
Keep effective leverage under 1:10 as a beginner.
Leverage Regulations by Region
Regulators have capped leverage to protect retail traders from themselves:
European Union (ESMA)
- Major forex: 1:30
- Minor forex: 1:20
- Crypto: 1:2
Since 2018
United Kingdom (FCA)
- Major forex: 1:30
- Minor forex: 1:20
- Crypto: 1:2
Follows ESMA rules
United States (CFTC/NFA)
- Major forex: 1:50
- Minor forex: 1:20
- No crypto CFDs
Strictest crypto rules
Australia (ASIC)
- Major forex: 1:30
- Minor forex: 1:20
- Crypto: 1:2
Changed in 2021
Offshore (Unregulated)
- Up to 1:3000 (!)
- No protection
- High scam risk
Avoid these brokers
💡 Why Low Leverage Limits Are GOOD
Traders in regulated markets (EU, UK, AU) complain about 1:30 leverage. But studies show these traders perform better and blow fewer accounts. The limits work.
Key Takeaways
Leverage amplifies EVERYTHING - profits, losses, emotions, and mistakes. It's not free money.
High leverage = Fast account death - With 1:500, a 20-pip move can wipe you out.
Margin calls are real - Understand margin requirements before trading.
Safe leverage for beginners: 1:10 to 1:20 - Master risk management first.
Regulated brokers = Safer leverage limits - This is protection, not limitation.