Leverage and margin explained

Leverage lets you control a large position with a small deposit. It is the main reason currency trading is accessible to individuals, and the main reason so many lose money.

How it works

With leverage of 50 to 1, a 2,000-dollar deposit, called margin, controls a 100,000-dollar position. The broker effectively lends you the rest. Your profit or loss is based on the full 100,000, not on the 2,000 you put up.

The arithmetic

A 1 percent move in the pair changes a 100,000-dollar position by 1,000 dollars. At 50 to 1 leverage that is half of the 2,000-dollar margin, gained or lost from a move that happens to major pairs in an ordinary week. A 2 percent move against you wipes out the deposit entirely.

Margin calls and stop-outs

Brokers require you to keep a minimum amount of equity in the account. If losses take you below it, you get a margin call: add money or reduce positions. If equity keeps falling, the broker closes positions automatically at the market price, which in a fast market can be worse than you expected.

Limits on leverage

Regulators cap retail leverage because of these risks. In the United States, retail forex leverage is limited to 50 to 1 on major pairs and 20 to 1 on others. The UK and European Union set similar or lower caps for retail clients. Offshore brokers offering several hundred to one are usually outside the protection of these regulators.

A safer way to think about it

Leverage is a ceiling, not a target. Professional traders typically size positions so a single loss costs a small, fixed share of the account, which in practice means using far less leverage than is available. See risk management for currency traders.