What Is Leverage?
Leverage is the ability to control a large position in the market with a relatively small amount of capital. In forex, brokers often offer leverage ratios from 1:10 to 1:500 or higher. This means you can open a $10,000 position with just $100 in your account if your broker offers 1:100 leverage.
"Leverage is a double-edged sword: it can amplify your gains, but it can also magnify your losses."
How Leverage Works
Leverage Ratio = Position Size / Margin Required Example: 1:100 leverage means $1 controls $100 in the market.
| Leverage | Margin Required | Position Size Controlled |
|---|---|---|
| 1:10 | $1,000 | $10,000 |
| 1:100 | $100 | $10,000 |
| 1:500 | $20 | $10,000 |
The Dangers of High Leverage
High leverage can tempt traders to risk too much. A small adverse price move can cause big losses, even margin calls. Many beginners blow their accounts by over-leveraging, thinking only of the potential gains.
I once opened a 1 lot trade on gold with 1:500 leverage on a $500 account. The price moved $10 against me, and my account was wiped out in seconds. Lesson learned: leverage is not free money!
"It’s not about how much you can make, but how much you can lose and still stay in the game."
How to Use Leverage Safely
- Use the lowest leverage possible (1:10 or 1:20 is plenty for most traders)
- Calculate your risk per trade and lot size carefully
- Always use a stop loss
- Never risk more than 1-2% of your account per trade
- Don’t let the broker’s maximum leverage tempt you into oversized trades
Comparison Table: Leverage and Account Risk
| Leverage | Account Size | Max Position Size | Risk of Ruin |
|---|---|---|---|
| 1:20 | $1,000 | $20,000 | Low |
| 1:100 | $1,000 | $100,000 | High |
| 1:500 | $1,000 | $500,000 | Very High |
Personal Anecdote
After blowing up my first account, I switched to a broker with lower leverage and focused on risk management. My trading became less stressful, and I finally started seeing consistent results. Understanding trading psychology helped me control my emotions and avoid revenge trading.
"Trade to survive first. The profits will follow."
Conclusion
Leverage can be a powerful ally, but only if used wisely. Respect its risks, use it sparingly, and always prioritize account protection over big wins. Remember, slow and steady wins the race in trading.
👉 Use our Lot Size Calculator to plan trades with safe leverage.
