In forex trading, traders can control large positions with small amounts of capital using a tool called leverage. By using leverage in forex, brokers open up trading opportunities to traders who don’t have initial large deposits. This has made leverage a uniquely useful tool for amateur and experienced traders. But leverage also increases the amount of risk a trader must take. In this article, we will cover how leverage in forex works by example, and then we will provide tips on how traders can make the best use of this tool.
How to Calculate Leverage in Forex?
When one thinks of trading, it seems intuitive and reasonable that a trader starts opening positions with their own capital. The concept of leverage allows traders to gain a foot in the door without much capital to start with. This is because leverage is essentially borrowed capital that allows traders to open positions much larger than their initial deposit.
The amount of leverage depends on the forex broker and the government regulations governing the market, but it is usually expressed as a ratio such as 50:1, 100:1, etc. The amount of capital you set aside to open a leveraged position is called your margin. Leverage is calculated through this equation:
Leverage = Total Position Size / Margin Used
A ratio of 50:1 means that a trader with an initial deposit of $1000 can control a position of $50,000. The remaining amount is provided by the broker, which allows the forex trader to amplify potential profits. But this sword has two edges, meaning that it also increases the risk of losses.
To understand how leverage works, it’s essential to first know about margin in forex, as it plays a significant role in determining your position size.
What Is an Example of Leverage in Forex?
Let’s assume that your trading account contains $1000 and the forex broker you choose offers a leverage ratio of 100:1. What this means is that even though you only have $1000, you can trade up to $100,000 worth of currency, where the remaining needed capital will be provided by the forex broker. Let’s assume two scenarios, one in which you profit and one in which you lose.
Scenario 1: A Profitable Trade
Say you decided to purchase EUR/USD at 1.1000 when you think the price will rise. With the leverage ratio of 100:1, you open a $100,000 position. If the price moves up to 1.1050, you have a 50-pip increase. In this scenario, your profit can be calculated as such:
50 pips x $10 per pip (for a standard lot) = $500
This means that there will be a 50% return on your initial deposit of $1000.
Scenario 2: A Losing Trade
In the trading game, there’s always a chance of losing, which is a natural occurrence for every forex trader who has ever lived. In this scenario, let’s assume that the price drops to 1.0950, which means a 50-pip loss. The calculation would be as follows:
Loss Calculation: 50 pips x $10 per pip = -$500
So you will lose $500 out of your $1000 investment, meaning that using leverage in this hypothetical scenario has resulted in you losing half of your initial investment.
Scenario 3: Using No Leverage
If you didn’t use leverage in any of these scenarios and only had $1000 (assuming traded micro-lots/0.01 lots), the 50 pips would have to be multiplied by $0.10 per pip instead of $10 per pip. This would lead to a $5 gain or loss and shows how leverage amplifies both potential profits and losses.
Example of 100:1 Leverage vs 500:1 Leverage
If you have a choice between two different types of leverage, it’s crucial to compare them. For example, comparing 100:1 and 500:1 leverage. The meaning of a 500:1 leverage is that a trader can open positions of up to 500 times their capital. With a $1000 deposit, you can trade up to $500,000. Choosing between different leverages also affects the voice of the lot size. There are three factors that influence lot size:
- Account balance (available capital)
- The leverage you and your broker settle on
- The margin required for the trade
The equation you can use to determine your maximum lot size is:
Maximum Lot Size = Account Balance ✕ Leverage ÷ Lot value
Your lot value is the notional value of the lot:
- Standard Lot (100,000 units) → 1 pip = $10
- Mini Lot (10,000 units) → 1 pip = $1
- Micro Lot (1,000 units) → 1 pip = $0.10
Let’s say you have $1000 and want to determine a 500:1 leverage lot size. Here’s how it would be calculated for a standard lot size:
Maximum Lot Size = 1000 ✕ 500 ÷ 100,000 = 5 Standard Lots
This means that in this scenario, you can open 5 Standard Lots. We should mention that a 500:1 leverage ratio is not common for beginner traders and has been used as a good example ratio to learn calculating lot sizes. Forex traders starting out usually work with 2:1, 10:1, and other smaller leverage ratios.
Types of Leverage in Forex Trading
Here are the different types of leverage in forex trading:
1. Fixed Leverage
A fixed leverage is a pre-determined ratio (like 50:1) that brokers provide. This ratio remains constant unless it is manually adjusted. Fixed leverages still have minimum margin requirements since margins work as collateral. The advantage of fixed leverage is that forex traders know exactly how much buying power they have and can predict potential risks. Fixed leverages are very common throughout regulated markets such as the EU and the US since they apply restrictions to leverages. Fixed leverage is best for forex traders who want stability and controlled exposure.
2. Variable Leverage
A variable leverage adds a layer of complexity to fixed leverage. As the name suggests, the leverage ratio in these cases is adjusted automatically based on account size, market conditions, or trading volume. For example, a forex broker might have their variable leverage automatically reduce leverage during high market volatility to protect traders whereas increase it automatically for larger account sizes. Though this flexibility in leverage is useful, it requires traders to keep an open eye on just how much leverage they have while trading.
Leverage can significantly increase your exposure, but it’s equally important to consider spread in forex trading to avoid higher costs on every trade.
Advantages of Using Leverage in Forex Trading
There are a few advantages of using leverage in forex trading instead of covering positions with your own capital:
- Profits amplify: By using leverage, traders can control large positions even when they lack much of the capital needed to control such a position normally. This can lead to significant returns compared to their initial deposit.
- More access to trades: Access to larger amounts of capital means access to more trade. This allows traders to take advantage of market movements that wouldn’t be available to them with their own capital.
- Increased flexibility: Using leverage, traders can implement more flexibility and diversity in their trading strategies even while they have minimal investment.
Risks Associated with Leverage
Leverage is associated with some types of risks that traders should be aware of before using it in their trades:
-
- Increased Risk of Loss: Just as leverage can increase profits, it also magnifies potential loss if the trade goes wrong. This means that traders using leverage might experience substantial losses when compared to their initial investments (take the loss example in this article)
- Psychological Pressure: If a trader works with too high a leverage, the pressure increases exponentially since the potential profits or losses can be so massive compared to their actual account size. This can lead to stress and make it difficult to make unemotional and rational trading decisions.
- Margin calls: If an account size using leverage takes losses to a point that its balance goes below the margin requirement for the leverage, the broker issues a margin call. This requires the account owner to deposit more funds. If they don’t, the broker might close the trader’s position to stop further losses.
Managing Leverage Effectively
A few tips that traders should know to manage their leverage effectively are the following strategies:
Using Stop-Loss Orders
Using stop-loss orders helps traders limit their potential losses by closing their position at a predetermined price level, which is important when it comes to losses that are a consequence of using high leverage.
Start with Lower Leverage
Beginner traders should not start out with high leverage since a single trade could significantly lose much of their capital. It’s best to use lower leverage, such as 10:1 or 20:1, and increase it as you gain more experience.
Hedging
In forex trading, hedging is when a trader opens a second trade to offset the risk of an open position. For example, if you open a buy position on a currency pair and the price starts falling, instead of the intuitive option to close the position, you sell a lot, which hedges the risk of the trade. If the price keeps falling, you can at least offset your loss with the profit of your sell position.
Usually, when the account balance goes below the margin call level, brokers don’t allow the trader to open new positions, even for hedging. But some forex brokers, such as STPTrading, allow hedging in a negative margin to help traders prevent further losses.
Using such tactics to avoid a margin call is called an anti-margin call. Anti-margin calls also include other tactics to prevent reaching a margin call level, such as depositing more funds in one’s account and adjusting stop-loss levels accordingly.
Maximum Allowed Leverage Ratios
It’s important to be aware of maximum leverage ratios, whether it’s the forex broker you have chosen or the region in which you are trading. The best forex brokers of 2025 also have the best leverage ratios combined with other functions. In the case of regulations, take as an example the EU; for retail traders, the maximum leverage ratio for major currency pairs is usually 30:1. In the US, the maximum ratio is usually 50:1. Leverage ratios that are too large, such as 1000:,1 are usually not appropriate for forex trading especially for beginners.. Since leverage ratios differ between markets, it’s important to choose the best market to trade for beginners starting out.
Conclusion on Leverage in Forex
Leverage is a powerful tool that opens up opportunities in forex trading to all traders, even when they don’t have enough capital to make big trades themselves. It allows traders to control large positions, but it also results in traders dealing with potentially significant losses if they aren’t careful. Traders should use this amazing tool cautiously by understanding how it works, how they can apply it to their own trading strategy, and how it can be used to properly manage long-term success in the forex market.
Ready to open up your trading account and take advantage of the forex market’s opportunities? Look no further than STPTrading, which offers various trading account types for traders looking for the best leverage ratios combined with negative balance protection. Check out STPTrading today!
Leverage gives you more exposure with less capital, but traders should also understand how Swap in Forex can impact their overnight positions.
To build a cost-effective trading strategy, it’s essential to understand how leverage interacts with different Types of Commission in Forex.
