Leverage directly affects how much margin is required to hold a position. It does not multiply your profit or loss.
Higher leverage requires less margin for the same position, leaving more free margin available. However, it also allows you to open larger positions with the same funds, which can increase your exposure and the risk of reaching a margin call or stop-out.
What Does a Leverage Ratio Mean?
A leverage ratio of 1:100 means that for every 1 unit of your own funds used as margin, you can control 100 units of the traded instrument.
How Does Leverage Affect Your Margin?
Required margin = (Contract size × Lot size × Market price) ÷ Leverage
Higher leverage means a lower margin requirement for the same position, leaving more free margins available.
Does Leverage Change Your Profit or Loss?
No. Your profit or loss depends on your position size and the price movement of the instrument. Leverage is not part of the profit or loss calculation.
Example 1 — The same trade at two leverage settings
You buy 1 standard lot of EUR/USD (100,000 units) at 1.1000. The position value is 110,000 USD.
Leverage Required margin
1:100 110,000 ÷ 100 = 1,100 USD
1:500 110,000 ÷ 500 = 220 USD
Leverage | Required margin |
|---|---|
1:100 | 110,000 ÷ 100 = 1,100 USD |
1:500 | 110,000 ÷ 500 = 220 USD |
At 1:500, you need 880 USD less margin to hold the same position. The position size and profit or loss per pip remain the same.
Example 2 — The Same Profit at Both Leverage Settings
The price rises from 1.1000 to 1.1050, a 50-pip move.
- Profit at 1:100: 500 USD
- Profit at 1:500: 500 USD
The profit is the same because the position size is the same. The difference is that the 1:500 position requires less margin.
Example 3 — Why Higher Leverage Can Increase Your Risk
You deposit 1,000 USD.
- At 1:100, you can open roughly 0.9 lots of EUR/USD based on the available margin.
- At 1:500, you can open roughly 4.5 lots.
If you open the maximum position in each case, a 20-pip move against you would result in an approximate loss of:
- 0.9 lots: 180 USD
- 4.5 lots: 900 USD
Higher leverage does not create the larger loss. The larger position size creates the larger loss. Higher leverage simply allows you to take a larger position with the same funds.
How Does Leverage Affect Margin Call and Stop-Out?
Leverage does not change the applicable margin call level of 50% or stop-out level of 20%.
However, higher leverage allows you to open larger positions, which can result in greater losses from the same price movement and cause your margin level to fall more quickly.
What Happens When You Change Leverage on Existing Positions?
Changing leverage does not close, resize, or otherwise change your open positions.
However, it may change the margin required for those positions, which can affect your free margin and margin level.
Important notes
- Choose your position size based on the amount you are prepared to lose, rather than the maximum position your leverage allows.
- Check your free margin before requesting a leverage reduction, as lower leverage may increase the margin required for existing positions.
- Leverage, margin requirements, and trading conditions may vary by product and account.
