What the ratio means
At 1:100, every dollar of your money controls a hundred dollars of position. A standard lot of EUR/USD is worth about $108,500, so at 1:100 it ties up roughly $1,085 of your balance as margin. At 1:500 the same position ties up about $217.
The part almost everyone gets wrong
Leverage does not set your risk. Your position size and your stop set your risk. A trader with 1:500 available who trades 0.01 lots with a twenty pip stop is risking two dollars, exactly the same as a trader with 1:30 doing the same thing. Higher leverage does not make a trade more dangerous; it makes a dangerous trade possible.
What it actually changes
Two things. How much margin a position ties up, and therefore how many positions you can hold at once. And how close you are to a margin call, because low margin usage leaves more free equity to absorb a losing position.
Why regulators cap it
Because the ability to open enormous positions on a small deposit is used, and traders lose their accounts doing it. Retail leverage is capped at 1:30 on major pairs in Europe and the UK, and at similar levels in Australia and Japan. Offshore brokers offer far more, which is the trade-off in choosing one.
In short
| Leverage 1:100 | $1 of margin controls $100 of position |
|---|---|
| Sets | Margin required, and how many positions fit |
| Does not set | Your risk on any single trade |
| EU / UK retail cap | 1:30 on major pairs |
Common questions
Is high leverage dangerous?
The leverage figure itself is not what hurts people. Trading a size that a normal losing run cannot survive is, and high leverage removes the barrier that would otherwise stop it. If your position size comes from your stop and your risk limit, the leverage number barely matters.
What leverage should I choose?
Enough that your intended positions do not tie up an uncomfortable share of the balance, and no more. If you never use more than a fraction of the margin available, extra leverage changes nothing about your trading.
Does leverage cost anything?
Not directly. The overnight financing on a leveraged position is the swap, which is charged separately and is a real cost on positions held for more than a day or two.
Trading forex and CFDs on margin carries a high level of risk. Most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade.