Leverage lets you control a large position with a small deposit. With 1:100 leverage and $1,000, you can open a $100,000 position. The broker lends you the rest. Your $1,000 is the margin — a good-faith deposit.
Leverage ratios vary: 1:10, 1:50, 1:100, 1:200, even 1:500 at some brokers. Higher leverage = less margin required. At 1:500, you'd only need $200 to control $100,000. Sounds great — until the trade goes against you.
Here's the critical part: leverage amplifies both directions equally. With 1:100 leverage, a 1% market move means a 100% change on your margin. If you have $1,000 controlling $100,000 and the market moves 1% in your favour, you make $1,000 (100% return). If it moves 1% against you, you lose $1,000 — your entire deposit.
This is why leverage is the most dangerous tool in forex. Used wisely, it's powerful. Used recklessly, it wipes accounts. Most retail traders who blow up do so because of excessive leverage.
Professional traders follow a simple rule: never risk more than 1-2% of your account on a single trade. With a $10,000 account, that's $100–$200 maximum risk per trade.
This means adjusting your position size and stop-loss distance to stay within that limit. If your stop-loss is 50 pips away and you're risking $100, your position should be 0.2 lots (50 pips × $2/pip = $100). This discipline is what separates profitable traders from gamblers.
A stop-loss is an order that automatically closes your trade when the price hits a level you've set. It caps your maximum loss. Every trade should have one — no exceptions.
If you don't use stop-losses and your account equity drops below the broker's required margin level, you'll receive a margin call. If it drops further, the broker will liquidate your positions automatically. This often happens at the worst possible price. Protect yourself: use stop-losses, manage position sizes, and respect leverage.