Forex leverage
Family III · Risk
Not to be confused with leverage, maximum leverage, leverage forex.
Forex leverage is the ratio between the total value of a foreign-exchange position and the deposit, called margin, that a trader must set aside to hold it. A ratio of 50:1 means one unit of margin supports fifty units of position value. The ratio is set by the broker and capped by the regulator in the trader's jurisdiction, so the permitted figure varies by country and account type.[1]
How the ratio translates into position size
Leverage is quoted as a ratio, not a percentage. A 100:1 ratio equals 1% margin; a 20:1 ratio equals 5% margin. The higher the ratio, the smaller the margin deposit for a given position, and the larger the position a fixed deposit can control.
Because profit and loss are calculated on the full notional value, leverage multiplies both outcomes. A move of 1% against a position held at 100:1 wipes out the entire margin deposit, which is why brokers apply a margin call and then close positions before the deposit is exhausted.
Worked example
The same position requires roughly one third of the deposit at 100:1 compared with 30:1, and the loss from an adverse price move is identical in both cases.
Where the figure comes from
The ratio offered on a forex account is not universal. Retail caps differ by regulator and by whether the client is classified as retail or professional; major currency pairs typically carry higher permitted ratios than exotic pairs. Brokers may also apply lower ratios to larger account balances or around scheduled news events.
Leverage is therefore a contractual and regulatory term of the account, not a fixed property of the currency pair being traded.
Often confused with
- leverage
- Leverage is the general concept of controlling a position larger than the capital committed, applying to equities, futures and other markets, whereas forex leverage is that concept as specified for currency pairs; the visible sign is that forex leverage is always quoted against a currency-pair margin requirement.
- maximum leverage
- Maximum leverage is the highest ratio a broker or regulator permits on an account, while forex leverage is the ratio actually applied to a given position, which may be lower; the visible sign is that maximum leverage appears in the account's terms rather than on an individual trade.
- leverage forex
- Leverage forex is the same subject written as a search phrase, whereas forex leverage is the standard term used in account documentation and margin calculations; the visible sign is that leverage forex appears in query strings, not in broker contracts.
See also
References
- ↑ European Securities and Markets Authority, product intervention measures on contracts for differences sold to retail clients, 2018 — leverage caps by asset class, margin close-out and negative balance protection; carried into national rules across the EEA thereafter. Applies to clients classified as retail. Professional clients fall outside it.