Leverage is a great tool for beginner traders with less capital than bigger market players. It can help you gain massive returns even if you don’t have a large trading account balance.
For this reason, many novices and even experienced traders often rely on trading with leverage to increase their trading profits.
While leveraged trading is as dangerous as it is lucrative, carefully using low leverages can help new traders survive and thrive in online trading.
Lesson Highlights
- Leverage can amplify your gains and losses when trading.
- Leverage in forex can range from as low as 10:1 to as much as 3000:1.
- Margin requirements imply the leverage ratio.
- Sticking to lower leverage ratios is more advisable for new traders.
Recalling Leverage
Leverage, alongside margin, is often called a double-edged sword in trading, and rightfully so. On the one hand, it can let you bag huge profits without much capital of your own. On the other, leverage can tank your trading account and even leave you owing your broker money.
Brokers offer leverages in ratios much larger than those in stocks. Forex leverage ratios can range from 50:1 to as high as 3000:1.
Provided you can afford the leverage’s margin requirement, you can control a position up to 3,000 times the amount in your account balance. But even with a modest amount, USD 500, for instance, you can control up to a US 25,000 position with a 50:1 leverage.
Leverage Ratios and Margin Requirements
You can’t use leverage if you don’t have enough funds or margin in your account. Each broker can set varying margin requirements, which can also vary per currency pair.
For example, the EUR/USD pair typically has a 2% margin requirement for leveraged trading. This means you’ll usually have a 50:1 leverage when trading this currency pair on margin.
With a 50:1 leverage, every USD 1 in your trading account has its buying power multiplied by 50.
The table below shows how much margin you need for specific leverage ratios and a 50,000-position size.
Position Size | Leverage Ratio | Required Margin |
USD 50,000 | 10:1 | USD 5,000 |
20:1 | USD 2,500 | |
50:1 | USD 1,000 | |
100:1 | USD 500 | |
200:1 | USD 250 |
You’ll notice that the required margin for a 5-mini lot position becomes progressively smaller as the leverage ratio increases.
This leverage principle allows traders to control positions much larger than their current funds will typically allow.
How Leverage Affects Your Balance
As leveraged trading lets you control large positions even with a small capital, you can quickly grow your account balance if you’re a skilled enough trader.
However, trading with leverage can also wipe out your capital if you’re not careful enough.
For instance, let’s say you have an open short position of one standard lot (100,000) in EUR/USD, and the market moves from 1% in your favor.
The table below shows how much your account balance will increase depending on the leverage ratio you’re using.
Leverage | Market Price Increase | Account Balance Increase |
100:1 | 1% | +100% |
50:1 | +50% | |
20:1 | +20% | |
10:1 | +10% | |
5:1 | +5% | |
3:1 | +3% | |
1:1 | +1% |
A 100:1 leverage effectively doubles your account balance, while a 1:1 adds exactly 1% only.
You may think it’s better to trade with a 100:1 leverage as it can make you richer more quickly. But you must remember that leverage works both ways. What leverage can give, it can also take away.
Look at the table below to see how a 1% market movement in the opposite direction will affect your account balance.
Leverage | Market Price Decrease | Account Balance Decrease |
100:1 | 1% | -100% |
50:1 | -50% | |
20:1 | -20% | |
10:1 | -10% | |
5:1 | -5% | |
3:1 | -3% | |
1:1 | -1% |
As you can see, higher leverage ratios don’t look as tempting when the market isn’t moving in your favor.
While a 100:1 leverage gives enough buying power to double your balance with just a 1% favorable market movement, it can also bankrupt you if the price goes the other way. And that’s just with a 1% movement; imagine how much more you stand to lose if the market moved 2% or even 5%.
A 1% negative movement is enough to trigger a margin call; more than that, your broker may go straight to the stop-out process.
Learn to Leverage Low
Sticking to lower leverage ratios—ideally capping at 3:1—can help you earn more profits without sticking your neck out too much.
Don’t be tempted by the promises of large gains from high leverages; these often come with risks that new traders can seldom survive.
Remember, a slow and steady trading pace almost always gives bigger net returns in the long run.
In the next lesson, you’ll learn something more about leverage—how it affects transaction costs.
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