Your account leverage is a ceiling. Effective leverage is what you are really running, and it is the number that decides how much a one percent move costs you.
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Effective leverage = total position value ÷ account equity. One standard lot of EUR/USD is about $108,500 of exposure. On a $10,000 account that is roughly 1:11 effective leverage, whatever the 1:500 on your account statement says.
Account leverage is the maximum ratio your broker will extend, written as 1:30, 1:500 and so on. It determines the margin required to open a position and nothing else.
Effective leverage is the ratio of the notional value of everything you currently hold to your account equity. If you have $10,000 and hold one standard lot of EUR/USD worth $108,500, your effective leverage is 10.85 to 1. Irrespective of whether the account is set to 1:30 or 1:1000.
The second number is the one that describes your actual exposure, and it is the one almost nobody calculates. Marketing talks about the first because a bigger figure sounds like a bigger benefit. The benefit is real but narrow: high account leverage frees up margin so you are not forced to close a position for administrative reasons. It does not improve any trade.
Effective leverage is a multiplier on market movement. At 1:10, a 1% move in the underlying is a 10% move in your equity. At 1:50, the same 1% move is 50%. Major currency pairs routinely move 0.5% to 1% in a day and gold considerably more, so these are not hypothetical scenarios.
| Effective leverage | Equity change on a 1% move | Move that halves the account |
|---|---|---|
| 1:1 | 1% | 50% |
| 1:5 | 5% | 10% |
| 1:10 | 10% | 5% |
| 1:30 | 30% | 1.7% |
| 1:100 | 100% | 0.5% |
At 1:100 effective, a half-percent move against you (an ordinary Tuesday) takes half the account. This is the mechanism behind almost every blown retail account, and it is entirely avoidable by sizing positions off risk instead of off available margin.
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Not investment advice. Past performance is not indicative of future results.