Whiteriver Capital

Leverage lets you control a position larger than the money in your account. It is how a retail trader with a few thousand dollars can take a position worth a hundred thousand, and it is how accounts disappear quickly.

How leverage works

Leverage is expressed as a ratio. At 30:1, every dollar in your account can control thirty dollars of market exposure.

With 1,000 dollars at 30:1 you can hold a position worth 30,000 dollars. A one percent move in that position is 300 dollars, which is thirty percent of your account. The market barely moved and you lost or gained a third of your money.

Leverage multiplies both outcomes equally. It does nothing to your probability of being right, and everything to the consequence of being either right or wrong.

Margin

Margin is the portion of your account set aside while a leveraged position is open. It is held as collateral and released when you close, so it is neither a fee nor money spent.

Initial margin is the amount required to open the position
Maintenance margin is the amount required to keep it open
Free margin is what remains available for new positions

At 30:1 leverage, a 30,000 dollar position requires 1,000 dollars of margin, since 30,000 divided by 30 is 1,000.

Futures work differently. Exchanges set margin per contract as a fixed dollar amount rather than a ratio, and many brokers offer reduced day trading margin for positions closed before the session ends. The Futures guide covers this.

Margin calls and liquidation

If open losses erode your account to the point where you no longer meet the maintenance requirement, the broker intervenes.

A margin call is a warning that you are approaching the threshold
A stop out, or liquidation, is the broker closing your positions automatically to prevent the account going negative

You should never see one.

A margin call means a position was sized such that ordinary market movement could not be absorbed. With a stop loss in place and a position sized against it, the trade closes at your level long before the account runs short of margin. Reaching a margin call is a sign that risk management was absent, not that the market did something unusual.

On a prop account you will not get that far either. The firm's daily loss limit and maximum drawdown sit well inside the broker's margin requirement, so you would breach a rule and lose the account before margin ever became the issue.

Treat this section as background on how the plumbing works rather than a situation you plan around.

Why leverage gets blamed unfairly

Leverage takes the blame for destroyed accounts, and the attribution is slightly off. Leverage is a facility you are offered. What destroys accounts is choosing a position size that only looked acceptable because the leverage allowed it.

A trader using 500:1 leverage who sizes positions so a stop loss costs half a percent of the account carries less risk than a trader at 5:1 sizing carelessly. Available leverage did not set their risk. Position size did, which is why Topic 7 matters more than this one.

Leverage by jurisdiction and product

Retail leverage limits are set by regulators and vary considerably.

European, UK and Australian retail limits are relatively low, commonly around 30:1 on major forex pairs and lower on other classes
Offshore brokers advertise far higher figures
Futures leverage is determined by contract size against margin requirement rather than by a published ratio

High advertised leverage is a marketing feature aimed at people who do not yet understand position sizing. Read it as information about who the broker is trying to attract.

Key terms