Broker leverage vs effective leverage
Broker leverage, such as 1:30 or 1:500, sets how much margin a position needs. At 1:30 you put up 1/30 of the position's value; at 1:500, 1/500. It's a maximum, not something you have to use.
Effective leverage is the size of what you've actually opened compared with your equity:
Effective leverage = Total position value ÷ Account equity
Two traders with 1:500 accounts can carry completely different risk. One opens 0.10 lot of EURUSD on $10,000, about 1.1 : 1 effective leverage. The other opens 5 lots, about 57 : 1. The broker setting is the same; the risk isn't.
What effective leverage means in practice
At 10 : 1, a 1% move against you costs 10% of your equity. At 50 : 1, the same move costs 50%. A 1% move in a day is ordinary for gold and happens in currency pairs too, especially around big news, so effective leverage is the number that tells you how much of your account one bad day can take.
| Instrument | Lots | Position value | Effective leverage on $10,000 | Margin at 1:30 |
|---|---|---|---|---|
| EURUSD at 1.1403 | 0.10 | $11,403 | 1.1 : 1 | $380.10 |
| EURUSD at 1.1403 | 1.00 | $114,030 | 11.4 : 1 | $3,801 |
| USDJPY | 0.10 | $10,000 | 1.0 : 1 | $333.33 |
| USDJPY | 1.00 | $100,000 | 10.0 : 1 | $3,333.33 |
| XAUUSD at 4,286.20 | 0.10 | $42,862 | 4.3 : 1 | $1,428.73 |
| XAUUSD at 4,286.20 | 1.00 | $428,620 | 42.9 : 1 | $14,287.33 |
One lot of gold at 4,286.20 is a $428,620 position, nearly four times the size of one lot of EURUSD. On a $10,000 account that's about 43 : 1 effective leverage from a single lot, which is why gold needs much smaller lot sizes. See the XAUUSD lot size calculator.
How margin is worked out
Margin = Position value ÷ Broker leverage
A 1-lot EURUSD trade worth $114,030 needs about $3,801 of margin at 1:30 and $1,140 at 1:100. Higher leverage lowers the margin, not the risk: the profit or loss per pip is the same either way. The margin calculator covers every pair and account currency, and leverage and margin explains why funded accounts often get less leverage than the challenge.
Margin level and margin calls
Margin level = Equity ÷ Margin used × 100
Brokers warn you, and later start closing positions, when the margin level falls to their margin call and stop-out levels. Margin call vs stop out explains both. Low effective leverage keeps the margin level high, so neither is likely to come into play.
Leverage limits around the world
- European Union (retail clients): national regulators apply the limits ESMA introduced in 2018: 30:1 on major currency pairs, 20:1 on non-major pairs, gold and major indices, and lower on other assets.
- United States: 50:1 on major currency pairs and 20:1 on others for retail forex.
- India: under FEMA, RBI allows residents to deal in forex only with authorised persons and for permitted purposes, and electronically only on RBI-authorised platforms or on NSE, BSE and MSE. RBI's rules make exchange-traded rupee currency derivatives a tool for hedging a real currency exposure, and exchange margins, not a leverage ratio, set what a position needs. RBI's Alert List names platforms that aren't authorised; it isn't exhaustive, and residents who trade on such platforms can face action under FEMA.
- Offshore brokers and prop firms often offer 1:100 or more, which is exactly why effective leverage needs watching.
Leverage on prop firm accounts
Some firms limit how much margin your open trades may use, for example 80% of the account. The calculator's optional margin rule field shows the most lots you can hold under it. Funded accounts often come with lower leverage than the challenge, so a size that was fine before can break the rule after you pass. The 80% margin rule and the prop firm lot size calculator cover this in detail.
A sensible way to use leverage
- Set risk per trade from your stop, usually 0.5% to 1% of the account, and let that set the lot size.
- Check the effective leverage of everything you have open together, especially trades that move together.
- Treat high broker leverage as room for margin, not as a target to fill.