What Is Leverage?
Use a "lever" to move a big position: at full leverage, a 1% price move can swing your margin by 100%.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Forex Basics, lesson 6: “What Is Leverage?”
Use a "lever" to move a big position: at full leverage, a 1% price move can swing your margin by 100%.
Control $100,000 with $1,000
leverage of 1:100 = put up $1 of margin to control a $100 position. The total you actually control is the notional value.
Full leverage: gains and losses both magnified
Use all $1,000 at 1:100 to open a $100,000 position: a mere 1% move means $1,000 of P&L. Right direction, you double; wrong direction, you hit zero.
Same position: changing leverage only changes the deposit
For the same $100,000 position, 1:50 locks up $2,000 and 1:200 only $500, but the P&L per pip is identical. What really decides your risk is position size (lots).
Key takeaways
- Leverage lets a small amount of margin control a big position: 1:100 = every $1 of margin controls $100 of position.
- At full leverage, a 1% price move ≈ a margin move of 1% × the leverage. At 1:100, a 1% move against you wipes it out.
- With the position size unchanged, changing leverage only changes how much margin is locked up, not your P&L per pip.
- Leverage is just a ceiling on how big a position you can open. You don't have to use it all; your real risk comes from position size.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- In "All capital in" mode, keep 1:100 and price +1%: what's the return on margin?
- Switch to 1:200 and drag the price to −0.5%: how much of the $1,000 is left?
- Switch to "Fixed position" with price +1% and flip between 1:50, 1:100 and 1:200: does the account P&L change? Which number does?
- Under "Fixed position", pick 1:10: why can't you open the position? How much margin would be locked up?
Quiz and explanations
- 1. You use $1,000 of margin at 1:100 to open a $100,000 position. The price moves 1% in your favor. Roughly what's your return on margin?
- Answer: 100%.$100,000 × 1% = $1,000, which is 100% of your $1,000 margin.
- 2. What's the biggest risk of leverage?
- Answer: It magnifies both gains and losses.A 1% move the wrong way also wipes out 100% of your margin.
- 3. Your account has $5,000 and you open a $100,000 position. At 1:100 and at 1:200 leverage, the price moves 1% against you. What are the losses?
- Answer: $1,000 both times.P&L = position × price move = $100,000 × 1% = $1,000, regardless of leverage. Leverage only changes the margin locked up ($1,000 vs $500).
Terms in this lesson
- leverage (Leverage): Controlling a large position with a small amount of margin; 1:100 means $1 controls a $100 position.
- lot (Lot): The unit of trade size in forex: 1 standard lot = 100,000 units of the base currency; 0.1 is a mini lot and 0.01 a micro lot.
- margin (Margin): The deposit set aside when you open a position = position value ÷ leverage.
- notional value (Notional): The total value of the asset a position controls; for example, 1 lot of EUR/USD ≈ $108,500.