What is leverage in forex, and how does margin work?
Leverage lets you control a large position with a small deposit. It makes both gains and losses bigger, so it is worth understanding before you use it.
For information only, not financial advice. Trading carries a high risk of loss. Results depend on the values you enter and on your broker's contract specifications. Risk disclosure
The short answer
Leverage is the ratio between the size of a position and the margin your broker holds for it. At 1:100 you control $100,000 with $1,000 of your own money. The broker lends the rest for as long as the trade is open. Leverage does not change what a pip is worth, only how little money you need to open a position.
How margin is calculated
Margin = position value / leverage. A standard lot of EUR/USD at 1.0850 is worth about $108,500. The margin your broker holds depends on the leverage on offer:
| Leverage | Margin for 1 standard lot at 1.0850 | Margin for 0.10 lots |
|---|---|---|
| 1:30 | $3,616.67 | $361.67 |
| 1:100 | $1,085.00 | $108.50 |
| 1:500 | $217.00 | $21.70 |
Margin is not a fee. It is part of your balance that is set aside while the trade is open and released when it closes. It does matter, because the money set aside is not available for other trades, and because if your equity falls too far, the broker can close positions.
Why leverage magnifies both sides
A 50 pip move on one standard lot of EUR/USD is worth about $500. On a $10,000 account that is 5% either way. On a $1,000 account the same trade is 50%. Leverage made that trade possible with a small deposit, but the profit or loss depends on the position, not on the margin. This is how a small account can lose most of its balance on a single trade.
Effective leverage is what counts
Maximum leverage is a limit your broker sets. Effective leverage is what you actually use: the total value of your open positions divided by your balance. One standard lot on a $10,000 account is $108,500 / $10,000 = 10.85:1. Trading 0.20 lots on the same account is 2.17:1. Both accounts could be on 1:500 leverage, yet the first is five times as exposed as the second. The leverage calculator shows yours.
Margin level, margin calls and stop-outs
- Used margin is the total margin held for your open positions.
- Free margin is your equity minus used margin, the money left to open more trades or absorb losses.
- Margin level is equity divided by used margin, usually shown as a percentage.
- A margin call is a warning when the margin level falls to a threshold your broker sets. A stop-out closes positions automatically at a lower threshold. The levels differ between brokers, so read yours.
Rules differ by region
Regulators in some places limit leverage for retail accounts, for example to 1:30 on major pairs in the UK and the EU, while other brokers offer 1:500 or more. Higher maximum leverage is not an advantage by itself. Use the margin calculator to see what your own trade would hold, and size positions from your risk, as in the position size guide.
For information only, not financial advice. Leveraged trading can lose more than your deposit with some brokers, and carries a high risk of loss.
Frequently asked questions
+What does 1:100 leverage mean?
You can open a position worth 100 times the margin you put up. To hold a $100,000 position you would need $1,000 of margin.
+Is higher leverage better?
Not by itself. Higher leverage only lowers the margin needed. Your risk depends on position size, so a high-leverage account with small positions can be safer than a low-leverage one with large positions.
+What is margin in forex?
Margin is the part of your balance your broker sets aside to keep a position open. It is not a fee, and it is released when the position closes.
+What is a margin call?
A warning, or an automatic closing of positions, when your equity falls too close to the margin your open trades need. The exact levels differ between brokers.
+What is effective leverage?
The total value of your open positions divided by your account balance. It shows how exposed you really are, whatever the maximum leverage your broker allows.