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Market Basics

What Is Leverage

Leverage is your broker letting you control a position many times the size of your deposit. This paper shows you what the ratio means, what a deposit controls at four common ratios, how the same real trade works out at 1:30, 1:100 and 1:500 in a big account and in a small one, why the lever lifts and drops by the same amount, and where your own ratio is written on the platform.

Difficulty
Beginner
Reading time
7 min
Pages
8
Reviewed by
Saman Rahbar

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A small weight, a long arm

Leverage is your broker letting you control more than you put down. The ratio is how many dollars of currency the broker lets you control for each dollar you put in. Deposit five hundred dollars at a ratio of one to five hundred and you can hold a quarter of a million dollars of currency. The money is not lent to you in any ordinary sense; you never see it. But the position — the trade you are holding — behaves as though you own all of it, and so do the profits and the losses.

A longer arm lets the same deposit hold a larger position. At one to thirty, five hundred dollars controls $15,000 of currency, and each pip — the fourth decimal place of the price — is worth $1.50. At one to five hundred the same five hundred dollars controls $250,000, and each pip is worth $25. The deposit did not change. What each pip does to it did.

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