Leverage ratio
Family III · Risk
Not to be confused with leverage, forex leverage, maximum leverage.
Leverage ratio is the relationship between the size of a position and the capital backing it. A ratio of 20:1 means each unit of account equity controls twenty units of notional exposure. The ratio is a structural property of the account, not a prediction of profit or loss.
How the ratio is calculated
The ratio is notional exposure divided by account equity. Equity is the account balance plus or minus open profit and loss, so the ratio changes while a position is open even if the position size does not. A trader who deposits 5,000 and opens a 100,000 position is running a 20:1 ratio at entry; if the position loses 2,500, equity falls to 2,500 and the same position now represents 40:1.
Because equity is the denominator, losses raise the ratio mechanically. This is why the ratio is a risk measure rather than a fixed account setting.
Worked example
The is-key row shows that the ratio doubled without any change in position size, purely because equity fell.
Regulatory variation
Maximum permitted leverage ratios differ by jurisdiction, by regulator and by instrument. Ratios available on major currency pairs are typically higher than those on individual equities or commodities, and some regulators impose fixed caps while others allow brokers to set lower limits. The applicable ratio is therefore a matter of local rules and the broker's own terms, not a single global figure.
Often confused with
- leverage
- Leverage is the general mechanism of controlling exposure larger than the capital committed, while the leverage ratio is the specific numeric multiple of exposure to equity; the visible sign is that leverage is described in words and the leverage ratio as a figure such as 20:1.
- forex leverage
- Forex leverage is the application of that mechanism to currency pairs, whereas the leverage ratio is the measurement itself and can describe any instrument; the visible sign is the presence of a currency pair in the context.
- maximum leverage
- Maximum leverage is the ceiling a regulator or broker permits on an instrument, while the leverage ratio is whatever level the account is actually running at; the visible sign is that maximum leverage is a limit and the leverage ratio is a current value.