Forex course · Section 2: Brokers, Leverage and Orders
Forex Leverage and Margin Explained with Real Numbers
How forex leverage works, how to calculate margin at 1:30, 1:100 and 1:500, and why leverage multiplies losses exactly as much as gains.
Beginner5 min read·6:55 video·Lesson 7 of 26·quiz: 4 questions
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Leverage lets you control a large forex position with a small deposit, and margin is that deposit: margin required = position value ÷ leverage, so at 1:100 a 110,000-dollar EUR/USD position needs 1,100 dollars of margin. Leverage does not make prices move more, but it makes each move count for more of your money, multiplying gains and losses equally. Most beginners who blow up an account do it with leverage, not with bad analysis.
Why forex uses leverage
Major currency pairs often move less than 1% in a day. Without leverage, a 1,000-dollar account trading EUR/USD would make or lose a few dollars a day. Brokers therefore let you open positions many times larger than your deposit. The ratio is written as 1:30, 1:100, 1:500 and so on, meaning you can control up to 30, 100 or 500 dollars of currency for each dollar of margin.
Margin is not a fee. It is part of your own money set aside while the position is open, and it is released when you close it.
The margin formula
Margin required = (lots × 100,000 × price of the base currency in your account currency) ÷ leverage
For a US dollar account:
- EUR/USD at 1.1000: 1 lot is 100,000 euros = 110,000 dollars.
- USD/JPY: 1 lot is 100,000 dollars, whatever the price.
- EUR/GBP: 1 lot is 100,000 euros; convert at EUR/USD, so 110,000 dollars if EUR/USD is 1.1000.
Example
Margin for EUR/USD at 1.1000.
| Position | Value | 1:30 | 1:100 | 1:500 |
|---|---|---|---|---|
| 1.00 lot | 110,000 dollars | 3,666.67 | 1,100.00 | 220.00 |
| 0.10 lot | 11,000 dollars | 366.67 | 110.00 | 22.00 |
| 0.01 lot | 1,100 dollars | 36.67 | 11.00 | 2.20 |
Some brokers set margin as a percentage instead: 1:30 is 3.33%, 1:100 is 1% and 1:500 is 0.2% of the position value. Brokers can also raise margin requirements before elections, central bank meetings or weekends.
Balance, equity, used margin and free margin
Your platform shows four numbers. Learn them now; the next lesson depends on them.
- Balance: your deposit plus closed profits minus closed losses.
- Equity: balance plus or minus the profit or loss on open trades. This is what your account is really worth right now.
- Used margin: the margin locked by your open positions.
- Free margin: equity − used margin. This is what is available to open new trades or absorb losses.
- Margin level: equity ÷ used margin × 100%. Brokers use it to trigger margin calls and stop-outs.
Example
Balance 2,000 dollars, 1:100 leverage. You buy 0.50 lot EUR/USD at 1.1000. Used margin = 0.5 × 110,000 ÷ 100 = 550 dollars. Free margin = 1,450 dollars. Margin level = 2,000 ÷ 550 = 364%.
EUR/USD falls 40 pips. At 5 dollars per pip, the open loss is 200 dollars. Equity is now 1,800 dollars, free margin 1,250 dollars, margin level 1,800 ÷ 550 = 327%.
How leverage multiplies gains and losses
What really matters is effective leverage: the total value of your open positions divided by your equity. It tells you how much a 1% move changes your account.
Change in account (%) ≈ effective leverage × price move (%)
Here is the same 2,000-dollar account opening the largest EUR/USD position each leverage limit allows (price 1.1000). A 1% move in EUR/USD is 110 pips.
| Leverage limit | Largest position | Effective leverage | 1% move in your favour | 1% move against you |
|---|---|---|---|---|
| 1:30 | 60,000 dollars (0.54 lot) | 30x | +594 dollars (+30%) | −594 dollars (−30%) |
| 1:100 | 200,000 dollars (1.81 lots) | 100x | +1,991 dollars (+100%) | Stopped out after about 55 pips |
| 1:500 | 1,000,000 dollars (9.09 lots) | 500x | +10,000 dollars (+500%) | Stopped out after about 11 pips |
The two right-hand columns are mirror images, except that a broker closes a losing account long before the full 1% move: the stop-out figures assume the common 50% stop-out level explained in the next lesson. EUR/USD moves 1% on many ordinary days. Positions here are rounded down to the 0.01 lot step.
Risk
At 1:500, a fully used account is closed out by a move of about 11 pips at a 50% stop-out level, and about 22 pips even if the broker let equity fall to zero. That is often just the spread widening at news plus a few seconds of noise. The leverage that made the +500% column possible is the same leverage that makes the account disappear.
Leverage limit vs risk per trade
Here is the most important idea in this lesson: your loss is set by position size and stop distance, not by the leverage ratio.
Example
Two traders each have 2,000 dollars and buy 0.10 lot EUR/USD with a 40-pip stop. Each risks 40 × 1 dollar = 40 dollars, or 2% of the account. Trader A has 1:30 leverage and locks 366.67 dollars of margin. Trader B has 1:500 and locks 22 dollars. If the stop is hit, both lose exactly 40 dollars.
So why do regulators cap leverage? Because a high cap removes the brake. With 1:500 nothing stops a beginner from opening 5 lots on a 2,000-dollar account, and that is how most accounts are lost: not on one bad idea, but on one oversized position.
A sensible approach is to decide your risk per trade first (for example 1% of equity, covered in Position Sizing), then let the position size follow from your stop. Used that way, you will rarely use more than a small part of even a 1:30 limit.
Tip
Track your effective leverage, not your broker's limit. Add up the dollar value of all open positions and divide by your equity. Many experienced traders keep it in single digits.
Retail limits around the world
Retail clients in the UK, the EU and Australia are limited to 30:1 on major pairs and 20:1 on others; the US limits retail forex to 50:1 on majors; Japan to 25:1. Offshore entities often offer 1:500 or more. These rules change, so check your broker's current terms; see How to Choose a Forex Broker.
Next, see exactly when your broker will close your trades for you in Margin Call and Stop-Out.
Key takeaways
- Margin is the deposit a broker locks to open a position: margin = position value ÷ leverage.
- Leverage lets a small deposit control a large position; it multiplies gains and losses by the same amount.
- Effective leverage (position value ÷ your equity) is what decides how much a price move changes your account.
- Your risk comes from position size and stop distance; a high leverage limit only lets you take more of it.
Quiz: check what you learned
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⚠ Not financial advice — educational signals only. Read the disclaimer.