What leverage is and is not
Leverage is the ratio between position size and margin held. At 1:100, every $1,000 of margin controls a $100,000 position. At 1:500, every $1,000 controls $500,000.
The trader does not borrow capital from the broker in the conventional sense. The position is synthetic — it mirrors price movement on the underlying instrument without transferring ownership. Margin is collateral against adverse movement, not a loan that incurs separate interest. Holding a forex position overnight does incur swap, but swap reflects the interest rate differential between the two currencies in the pair, not interest on borrowed money.
The common description of leverage as "borrowing from your broker" is loose. No capital changes hands. The mechanics are closer to a synthetic futures position than to a margin loan.
How leverage and margin relate, with worked numbers
For a USD account opening 1 standard Lot size of EUR/USD at 1.0850 with 1:100 leverage:
- Account currency
- USD
- Instrument
- EUR/USD
- Lot size
- 1.00 standard
- Entry price
- 1.08500
- Leverage
- 1:100
- Position notional
- Margin held
The margin is reserved capital, not a cost. It is returned to the account when the position closes, regardless of profit or loss. The cost of opening the position is the Spread, which is separate from margin entirely.
Higher leverage does not change the position size. At 1:500, the same 1-lot EUR/USD position holds only $217 in margin. The position behaves identically; the difference is how much capital is reserved versus available as free margin.
Leverage as risk amplifier
A 100-pip adverse move on a 1 standard lot EUR/USD position is a $1,000 loss, regardless of leverage. The underlying P&L is determined by pip count and Pip value, not by leverage.
What leverage changes is what that loss represents as a percentage of the margin held against the position. At 1:100 with $1,085 margin, the $1,000 loss is 92.2% of that margin; at 1:200 with $542.50 margin, the same $1,000 loss is about 184% of it. Neither ratio force-closes the position on its own. A stop-out is an account-level event: the broker closes positions only when the account's margin level — equity divided by total used margin, as a percentage — falls to the broker's stop-out level, commonly around 50% but set by the broker and variable. As long as free margin sits behind the position, the margin level stays well above that threshold and nothing is closed.
The effect on the account depends on free margin. With $10,000 account equity and $1,085 margin held (1:100), the $1,000 loss is 10% of equity. With the same $10,000 equity at 1:200, margin held drops to $542.50 — the $1,000 loss is still 10% of equity, but the position can be sized twice as large before margin is fully reserved, allowing twice the loss exposure if the trader takes that opportunity. Leverage does not amplify loss probability; it amplifies the size of every outcome the trader sizes into.
Margin call and stop-out: the broker's two thresholds
Two broker-defined levels sit below an open position, not one. The margin call is the warning: when the margin level — equity divided by margin held — falls to a broker-set level, commonly around 100%, the broker flags the account and may block new positions while closing nothing. The stop-out is lower, commonly around 50% of margin held though it varies by broker, and it is mandatory: the broker closes open positions automatically, largest losing position first, until the margin level recovers above the threshold. Both levels are set by the broker and published in its terms.
Worked example: opening 1 lot EUR/USD at 1.0850 with $10,000 equity and 1:100 leverage. Margin held = $1,085. The margin call warning fires when equity falls to the margin held, $1,085 — a loss of $8,915, or 892 pips of adverse movement. The stop-out, at 50% of margin held, sits at $542.50 — a loss of $9,457.50, or 946 pips, before the broker closes the position.
The trader's Stop-loss is the price-controlled exit. The stop-out is the broker's mechanical floor. They serve different functions: a stop-loss closes the position at a chosen price; a stop-out closes whatever positions are open to bring the margin level above the broker's threshold. The broker's close-out executes slower than a stop-loss and at market price, not at a chosen level.
Why the maximum leverage on offer varies
The maximum leverage a broker offers varies by broker, by account type, and by instrument. Major FX pairs are typically offered at the highest ratios; gold, commodities, equity indices, and cryptocurrencies are usually offered lower maximums, because they move more in a single session. The exact ceilings differ from one broker to the next and are set out in each broker's terms.
Lower available leverage on an instrument is a statement about its volatility, not about the trader. A market that can move several percent in a day reserves more margin per unit of exposure, which caps how large a position the same deposit can open.
Maximum leverage and chosen leverage are different decisions. The ceiling sets the largest position the account can open; the position size the trader actually takes sets the dollar risk. A high available ceiling does not require using it — the risk is in the position size selected, not in the number the broker advertises.