Leverage Ratios and Exposure

Ratio to margin

Margin requirement is one divided by the leverage. 1:30 is 3.33 percent, 1:50 is 2 percent, 1:100 is 1 percent, 1:200 is 0.5 percent, 1:500 is 0.2 percent. Brokers often quote the requirement rather than the ratio on the symbol specification, so it is worth being able to convert in your head.

Exposure

Add up the notional value of every open position. Two standard lots of EUR/USD at 1.1000 is 220,000 dollars of exposure. Add a mini lot of GBP/USD at 1.2500 and it is 232,500. A 1 percent adverse move across the board is 2,325 dollars, whatever the leverage ratio. Positions in the same direction on correlated pairs add exposure to the same risk; a later lesson deals with correlation.

Offered versus used

Your broker offers 1:500. You have 5,000 dollars and open one mini lot of EUR/USD, 11,000 dollars of exposure. Your used leverage, exposure divided by equity, is 2.2, written 1:2.2. The offered figure is irrelevant to that trade. Used leverage is the number that describes your risk, and professionals rarely run it above 1:5 to 1:10 across a whole account.

Why brokers advertise the ratio

Because a high ratio lets a small account open large positions, and large positions generate spread and commission. The offered ratio is a feature of the broker's business model; the used ratio is a feature of your discipline.

Key takeaways

• Margin requirement is one over the leverage ratio.
• Exposure is the sum of notional position values; it drives loss.
• Used leverage is exposure over equity; the offered ratio is just a limit.
• Keep used leverage low regardless of what is offered.