Leverage
Family III · Risk
Not to be confused with margin, forex leverage, maximum leverage, leverage forex.
Leverage expresses how much market exposure a trader controls relative to the funds set aside for that position. A ratio of 20:1 means each unit of committed capital supports twenty units of notional value. Leverage magnifies both gains and losses in the same proportion, and the ratio available to a retail client is set by the regulator or broker rather than by the trader.[1]
How the ratio is calculated
Leverage is notional exposure divided by committed capital. It is a ratio, not a sum of money, so it is written as 20:1, 50:1 or 100:1 rather than as a currency amount. The same ratio can describe a small or a large position.
Because the ratio is fixed at the point of entry, the cash loss or gain on a position moves by the full notional amount, while the capital committed stays constant. That is why leverage is described as magnifying outcomes rather than changing the underlying price move.
Worked example
A 1% adverse move on the notional value is 1,000 units, which is 20% of the committed capital. The ratio, not the price move, determines that multiplication.
Where the ratio comes from
The maximum leverage a retail client may use is set by the relevant regulator and varies by jurisdiction and by asset class. Brokers may offer less than the regulatory ceiling, and professional or institutional accounts are often subject to different limits. There is no single universal figure.
Leverage is distinct from the margin requirement that accompanies it: the margin is the cash deposit, while leverage is the ratio between that deposit and the position it supports.
Often confused with
- margin
- Margin is the cash deposit required to open or hold a position, whereas leverage is the ratio between that deposit and the position's notional value; the visible sign is that margin is stated as a currency amount or percentage, while leverage is stated as a ratio such as 20:1.
- forex leverage
- Forex leverage is the same ratio applied specifically to currency pairs, where it is conventionally quoted against the base currency of the pair; the visible sign is that the ratio is attached to a currency pair rather than to a generic position.
- maximum leverage
- Maximum leverage is the highest ratio a regulator or broker permits for a given client and asset class, whereas leverage itself is whatever ratio the trader actually uses; the visible sign is that maximum leverage is a ceiling figure published in a schedule, not a figure chosen per trade.
- leverage forex
- Leverage forex is a word-order variant used in some search queries and headings for the same concept as forex leverage; the visible sign is the reversed phrasing, with no difference in meaning.
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.