Leverage Explained Simply
In forex, a standard lot is 100,000 units of currency. If you want to buy 1 lot of EUR/USD, you would normally need $100,000. Most retail traders do not have that kind of capital sitting in a trading account. Leverage solves this problem.
When your broker offers you 1:500 leverage, they are saying: for every $1 you deposit, you can control $500 worth of currency. So with $200 in your account, you can open a position worth $100,000 (1 standard lot).
Think of it like a deposit on a property. You put down $200 and the broker lends you the rest to control the full $100,000 position. Your profit or loss is calculated on the full $100,000 position, not on your $200 deposit. This is why leverage amplifies both gains and losses.
Simple math: With 1:500 leverage and a $200 deposit, you control $100,000. If EUR/USD moves 1% in your favor, your profit is $1,000 (1% of $100,000). That is a 500% return on your $200 deposit. If it moves 1% against you, you lose $1,000, which is five times your deposit.
How Leverage Is Expressed
Leverage is written as a ratio. The first number is your capital, and the second is the total position size you can control.
$1 controls $50. A $2,000 deposit controls $100,000 (1 standard lot).
$1 controls $100. A $1,000 deposit controls $100,000 (1 standard lot).
$1 controls $200. A $500 deposit controls $100,000 (1 standard lot).
$1 controls $500. A $200 deposit controls $100,000 (1 standard lot).
Higher leverage means a smaller deposit is required to open the same size trade. It does not change the size of the trade itself or the profit/loss per pip. A 1-lot trade on EUR/USD is worth $10 per pip whether you use 1:50 or 1:500 leverage. The only difference is how much margin your broker holds from your account.
Leverage vs Margin
Leverage and margin are two sides of the same coin. Leverage is the ratio. Margin is the actual dollar amount your broker holds as collateral when you open a trade.
If you use 1:100 leverage on a 1-lot EUR/USD trade ($100,000), your margin is 1% of $100,000 = $1,000. That $1,000 is locked in your account while the trade is open. The rest of your account balance is "free margin" available for other trades or to absorb losses.
| Leverage | Margin % | Margin per Lot (EUR/USD) |
|---|---|---|
| 1:500 | 0.2% | $200 |
| 1:200 | 0.5% | $500 |
| 1:100 | 1% | $1,000 |
| 1:50 | 2% | $2,000 |
The table above shows the margin required to open 1 standard lot on EUR/USD at each leverage level. At 1:500, you need just $200. At 1:50, you need $2,000 for the same trade. The profit and loss per pip is identical in both cases. The difference is how much of your account is tied up as margin.
A Practical Example
Let's walk through a real trade to see how leverage works in practice.
Setup
- Account balance: $1,000
- Leverage: 1:500
- Trade: Buy 1 standard lot EUR/USD at 1.0800
- Margin required: $200 (0.2% of $100,000)
- Free margin after opening: $800
- Pip value: $10 per pip on 1 standard lot
Winning scenario
EUR/USD rises from 1.0800 to 1.0850 (50 pips). Your profit is 50 x $10 = $500. That is a 50% return on your $1,000 account. Without leverage, controlling $100,000 would have required the full amount, and $500 profit on $100,000 is just 0.5%.
Losing scenario
EUR/USD drops from 1.0800 to 1.0750 (50 pips). Your loss is 50 x $10 = $500. Half your account is gone from a single trade. If price drops 80 pips, your loss is $800, leaving only $200 in your account and likely triggering a margin call.
This example shows why position sizing matters more than leverage. A 1-lot trade on a $1,000 account is extremely aggressive regardless of leverage. A more responsible approach would be trading 0.10 lots (a mini lot), where each pip is worth $1 and a 50-pip stop loss costs $50, or 5% of the account.
The Upside of Leverage
Smaller capital requirement
Without leverage, forex trading would be reserved for institutions and wealthy individuals. A retail trader with $1,000 to $5,000 can participate in the same market because leverage bridges the gap between account size and position size.
More trading opportunities
Lower margin requirements mean more of your balance stays as free margin. This allows you to have multiple positions open at the same time. A trader using 1:500 leverage with $2,000 in their account has $1,800 in free margin after opening a 0.10-lot trade (margin: roughly $20). That free margin can support additional positions across different pairs.
Flexibility in position sizing
Higher leverage gives you more granular control over position sizing. You can trade micro lots (0.01), mini lots (0.10), or standard lots (1.00) with proportionally small margin. This flexibility lets you tailor your risk per trade precisely, which is critical for any serious risk management plan.
The Downside of Leverage
Amplified losses
The same mechanism that magnifies profits also magnifies losses. A 1% move against a fully leveraged position at 1:500 wipes out five times your margin. Traders who do not use stop losses or who over-leverage their accounts are the ones who blow up. The leverage itself is not the problem. Using it without a plan is.
Margin calls
When your losses eat into your free margin and your margin level drops below the broker's threshold, you receive a margin call. This is a warning to either deposit more funds or close positions. If you do not act and your margin level drops further, the stop-out level triggers automatic position closures to prevent your account from going negative.
Emotional trading
High leverage makes every pip worth more relative to your account. A $10 per pip trade on a $1,000 account means your P&L swings $100 for every 10-pip move. Those swings trigger emotional reactions: fear, greed, revenge trading. Many beginners over-leverage, watch their P&L fluctuate wildly, and make impulsive decisions they would never make with smaller position sizes.
How to Choose the Right Leverage
There is no universally correct leverage. The right level depends on your experience, trading style, and risk tolerance. Here are some guidelines:
Beginners: 1:50 to 1:100
If you are new to forex, start with lower leverage. It limits your position size, which limits your loss per trade. This gives you room to make mistakes while you learn without devastating your account. Once you have a consistent strategy and solid risk management habits, you can increase leverage.
Intermediate: 1:100 to 1:200
Traders with at least 6 to 12 months of live trading experience who have a tested strategy and understand their risk per trade can use moderate leverage. This gives more flexibility without excessive exposure.
Experienced: up to 1:500
High leverage is a tool for experienced traders who know exactly how much they are risking per trade. They use it not to take bigger positions, but to free up margin for multiple positions or to reduce the capital locked in each trade. They always use stop losses and never risk more than 1-2% per trade.
Remember: Having access to 1:500 leverage does not mean you should use 1:500 leverage on every trade. Think of it as the maximum available to you. Your actual effective leverage on each trade should be determined by your position size and risk management plan, not by the maximum your broker allows.
Leverage at LHFX
LHFX offers flexible leverage up to 1:500 on forex pairs. You can adjust your leverage at any time through your dashboard, so you are never locked into a level that does not fit your current strategy.
on major and minor forex pairs
change your leverage anytime from your dashboard
no dealing desk interference with your leveraged positions
your account cannot go below zero
For full details on leverage by account type and instrument, see the leverage page.
Risk disclosure: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never trade with money you cannot afford to lose.