Leverage ratios in forex trading: allowing small capital to move the big market

Leverage trading is highly favored in the foreign exchange market because its core advantage lies in allowing investors to control large positions without having to invest all the trading capital. So what exactly is the concept of leverage ratio? How can it be used reasonably to profit in trading?

Basic Understanding of Leverage and Leverage Ratio

Definition of Leverage

Leverage is a trading financing mechanism—investors only need to deposit a certain proportion of the funds (margin), while the rest is provided by the broker through short-term loans. This method allows traders to control trading positions worth far more than their invested capital, thereby amplifying potential gains.

Explanation of Leverage Ratio

The leverage ratio is a key indicator measuring the relationship between trading funds and actual principal. It indicates how many times the investor can trade with their funds. For example, a 1:100 leverage ratio means that for every $100 of margin deposited, the investor can trade $10,000.

Margin Requirements Corresponding to Different Leverage Ratios

Brokers determine margin requirements based on the trading scale. When a trader buys a EUR/USD position of $100,000, and the margin requirement is $1,000, the margin rate is 1%, corresponding to a leverage ratio of 1:100.

As the margin requirement decreases, the available leverage multiple increases. Brokers also adjust leverage settings based on the volatility of currency pairs—for highly volatile currency pairs, brokers typically raise margin thresholds to control risk.

Practical Case Analysis of Leverage Trading

Trading Scenario Setup

Suppose the current EUR/USD quote is 1.26837, and the trader decides to buy 1 lot of euros. The full position value is 1.26837 × 100,000 = $126,837.

Using 1:200 Leverage

If the broker offers 1:200 leverage, the trader only needs to deposit 126,837 × 0.5% = $634.19 as margin to hold a full position worth $126,837. The remaining funds are borrowed from the broker.

Profit and Loss Calculation

The key point is—both profits and losses are calculated based on the full position value, not just the invested margin.

• If EUR/USD rises to 1.26867, profit = (1.26867 - 1.26837) × 100,000 = $300
• Conversely, if it drops to 1.26707, loss = (1.26707 - 1.26837) × 100,000 = $13,000

Risks and Opportunities of Leverage Trading

Leverage trading is a double-edged sword. When the market moves favorably, leverage can significantly amplify gains; however, when the market moves against, losses can also multiply, and investors may even lose their entire trading capital.

This is why leverage must be used cautiously. Beginner traders should practice thoroughly with demo accounts to understand how to use leverage before investing real funds in live trading.