Leverage

What leverage is

Leverage is the ratio between the size of a position and the money the trader has to put up to hold it. At 1:30 a trader deposits 1,000 dollars of margin to control 30,000 dollars of currency; at 1:500 the same 1,000 dollars controls 500,000. The broker is not lending the trader money in the ordinary sense, because no currency is delivered, but the effect is the same: the trader's profit and loss are calculated on the full position, not on the margin.

That is why leverage is described as a multiplier. A one percent move in EUR/USD is a one percent gain or loss on the notional position, which at 1:30 is 30 percent of the margin and at 1:500 is 500 percent of it. A position at 1:500 that moves 0.2 percent against the trader has lost the whole deposit.

How it is capped

Regulators in the largest markets cap the leverage a broker may offer retail clients, and the caps explain a great deal about where brokers are based and where clients are served from.

• Japan: 1:25 on all currency pairs.
• United States: 1:50 on major pairs and 1:20 on others.
• European Union, United Kingdom and Australia: 1:30 on major pairs, 1:20 on other pairs, gold and major indices, 1:10 on other commodities and minor indices, 1:5 on shares and 1:2 on cryptocurrencies.
• Singapore: 1:20 for retail clients.
• Offshore centres such as the Seychelles, Mauritius, Vanuatu and Belize: no cap, with 1:500 to 1:2000 common and unlimited leverage on small balances offered by a few brokers.

A broker group serving clients worldwide typically holds licences in several of these and routes each client to an entity by residence, so the leverage a trader is offered depends on where they live and which entity accepts the account, not on the brand. The leverage limits paper in the research section maps the caps and their history.

What leverage changes and what it does not

Leverage changes only how big a position a given deposit permits. It does not change the profit or loss on a position of a given size, which is set by the pips moved and the pip value. A trader who wants to hold one lot of EUR/USD makes and loses the same 10 dollars a pip at 1:30 and at 1:500; the difference is that the first needs about 3,900 dollars of margin and the second about 230.

What high leverage does in practice is tempt the trader to hold a larger position than the account can survive. The protections that came with the leverage caps, negative balance protection and an automatic close-out when equity falls to half the required margin, exist because regulators found that most retail losses came from exactly that.

How to think about the number

The useful question is not how much leverage the broker offers but how much the trade uses. A trader who sizes positions from the risk they are prepared to take, using the position size calculator, will usually find the effective leverage of a sensible position is a small fraction of the maximum, often under 1:10. At that point the broker's cap is irrelevant, and the reasons to prefer a capped, regulated entity, negative balance protection, client money rules and a compensation scheme, become the deciding factors.