Leverage
Leverage — The ratio between the size of a position and the margin it requires — a limit on what you may open, and not, by itself, a measure of risk.
Leverage is described as dangerous so often that the actual mechanism gets lost. It decides how much of your money is reserved while a position is open. It has no effect whatsoever on how much that position gains or loses per pip — and believing otherwise leads people to the wrong safety measure.
In plain English
Leverage is written as a ratio: 1:30, 1:100, 1:500. It says how many units of position your broker will let you control per unit of margin you set aside. At 1:100, a 100,000 EUR position requires 1,000 EUR of margin. At 1:500 the same position requires 200 EUR.
That is the whole mechanism. Notice what is absent: nothing about profit, nothing about loss, nothing about the market. A 100,000 EUR position gains and loses the same amount per pip whether the broker reserved 1,000 EUR against it or 200. The leverage changed what was reserved, not what was exposed.
So why the reputation? Because leverage removes the constraint that would otherwise stop people. A trader with 2,000 in an account at 1:30 simply cannot open a full lot of EUR/USD — the margin is not there. At 1:500 they can, and the position they can now open is one where a 40-pip move against them costs a fifth of the account. High leverage is not risk; it is the removal of an accidental brake, and the danger is in what people do once it is gone.
The formula
Margin required = position value ÷ leverage · Effective leverage = total position value ÷ equity
- The first is your broker’s number, and it is a permission.
- The second is your number, and it is a description of what you have actually done. It is the one worth watching.
A trader on a 1:500 account holding 0.1 lots on a 10,000 balance has an effective leverage of about 1:1. A trader on a 1:30 account holding 5 lots on the same balance is at roughly 1:50. The account setting told you almost nothing; the position told you everything.
Worked example — the demo account
A statement does not record leverage, so this one is worked from stated inputs rather than from the demo account. One lot of EUR/USD at a price of 1.0850, in a 10,000 USD account.
| Position | 100,000 EUR | one lot — a quantity of the BASE currency |
|---|---|---|
| Margin at 1:30 | $3,616.67 | 100,000 ÷ 30 = 3,333.33 EUR, converted at 1.0850 |
| Margin at 1:100 | $1,085.00 | |
| Margin at 1:500 | $217.00 | |
| Loss on a 20-pip move against, at every one of them | $200.00 |
The margin varies by a factor of sixteen across those three settings. The loss does not vary at all.
That last row is the entire argument. Three accounts, three leverage settings, one identical position, and identical money at risk. What differs is only how much of the balance was unavailable while the trade was open.
Where leverage does bite is at the extremes. At 1:30 that single lot ties up over a third of a 10,000 account, so a second position may be impossible and a modest adverse move can put the margin level near a stop-out. The constraint is real — it is just a constraint on capacity, not on exposure.
Every figure above is from the demo account TapeSheet ships with — 96 closed trades, generated from a fixed seed. Open the same account →
What this does not tell you
The caveat is the part worth reading. Most tools put it in a footer, if they print it at all.
- Nothing about your loss per pip. That is position size and stop distance, and only those. If you want to change your risk, change your position size; changing leverage changes a permission.
- Nothing about your effective leverage, which is the number that actually describes your account. A high account setting used conservatively is harmless. A low one used to the limit is not.
- Nothing about margin-call risk on its own. That depends on equity against used margin, so it is decided by how much you opened and how far it has moved — the leverage only set the ceiling on the first of those.
- Nothing about your broker’s behaviour in a gap. Negative-balance protection, stop-out ordering and weekend margin increases are separate policies, and the ones that decide what happens on the worst day are usually not the ones in the advertisement.
Where TapeSheet shows it
Read from the statement header where the broker writes it, and shown on the account panel next to the currency and account number. TapeSheet does not use it in any calculation — it is context for reading the file, not an input to a metric.
Questions
Is 1:500 leverage dangerous?
The setting is not; what it permits is. It is genuinely useful to a trader who sizes by risk and wants capital free for other positions, and genuinely dangerous to one who sizes by "what can I open", because it removes the only limit that was stopping them. The same number is safe or lethal depending on the person using it, which is exactly why regulators cap it rather than educating around it.
Why did the EU cap retail leverage at 1:30?
Because outcome data showed the majority of retail CFD accounts losing money, and high leverage was strongly associated with the largest losses. The cap is a blunt instrument aimed at the behaviour rather than the mechanism — it makes the oversized position impossible to open rather than trying to persuade anyone not to open it. Professional classification lifts it for those who qualify.
Does higher leverage increase my costs?
Not directly. Spread and commission are charged on position size, and leverage does not change position size. Indirectly it can, because more free margin makes more simultaneous positions possible and each of those pays its own costs. Swap is also charged on the full position value rather than on the margin, which surprises people who assume they are only financing the reserved part.
Related terms
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