Leverage determines how much margin is required to support a leveraged position. A higher leverage setting generally means less margin is required for the same position, leaving more free margin available. However, leverage does not change the profit or loss generated by a given position. Your profit or loss depends on the position size and the price movement of the instrument.
What does a leverage ratio mean?
A leverage ratio of 1:100 means that the required margin is approximately 1% of the position's value, subject to the applicable margin calculation method and trading conditions.
For example, where a product uses a simple leverage-based margin calculation, higher leverage requires less margin for the same position size.
How does leverage affect required margin?
Higher leverage generally means less margin is required for the same position, while lower leverage generally means more margin is required.
For example, assuming the applicable margin is calculated directly using leverage:
- A 1:100 leverage setting would require more margin.
- A 1:500 leverage setting would require less margin for the same position.
The position itself is the same in both cases. The difference is the amount of margin required to support it.
Not all products use the same margin calculation. Product-specific margin requirements, fixed leverage limits, margin percentages, and other conditions may apply. See How do I calculate my margin requirements? for more information.
Does leverage change a position's profit or loss?
No. If you open the same position at different leverage settings, the profit or loss from a given price movement is the same.
For example, if the same 1-lot EURUSD position gains 50 pips, the trading profit is the same whether the position is held with 1:100 or 1:500 leverage.
The difference is the amount of margin required to support the position.
Why can higher leverage increase risk?
Higher leverage allows you to control a larger position while using less margin.
If you use the additional available margin to open a larger position, a given price movement will result in a larger profit or loss.
For example, a 20-pip movement against a 1-lot EURUSD position produces the same approximate loss regardless of whether the account has 1:100 or 1:500 leverage.
The higher-leverage account does not make the loss larger by itself. The larger position size is what may create the larger potential loss.
This is why having access to higher leverage can increase your exposure if you use it to take larger positions.
How does leverage relate to stop-out risk?
Your leverage setting does not change the applicable margin-call or stop-out level by itself.
However, leverage affects the amount of margin required to support a position. If you use higher leverage to open a larger position, your equity can be affected more quickly by adverse price movements.
Monitor your equity, free margin, and margin level rather than looking at leverage alone when assessing your account risk. For details of the applicable margin-call and stop-out levels, see When will Moneta Markets automatically close my positions during a stop-out?
What happens when I change account leverage?
Changing your account leverage does not automatically change the size of your open positions.
However, changing leverage may affect the margin required to maintain those positions. Reducing leverage increases the margin requirement in applicable circumstances, which may reduce your free margin and margin level.
If your account has insufficient margin after leverage is reduced, your open positions may be forcibly closed.
Before requesting a leverage change, check your available equity, free margin and the potential impact on your existing positions.
Before changing your leverage, check the margin requirements that will apply to your existing positions.
How can I manage leverage related risk?
- Choose your position size based on the amount of risk you are prepared to take, rather than the maximum position your leverage may allow.
- Keep sufficient free margin available to support your open positions.
- Consider how a larger position would affect your account if the market moves against you.
- Check the applicable margin requirements for the specific product before trading.
