Leverage, margin and liquidation: caps by jurisdiction and the account arithmetic

The precise definition of leverage

Leverage describes the ratio between notional trade value and the capital actually committed. Leverage of 100:1 means one dollar of margin controls a notional position of 100 dollars. It is worth stressing that leverage amplifies the effect of price movement on account equity; it creates no return by itself.

Margin is the money a broker requires you to keep aside to cover potential losses. It is not a fee and not a cost. It is merely set aside and released when the position closes.

Retail leverage caps by jurisdiction

Because retail traders have long shown a high loss rate, the major jurisdictions cap leverage. These are the retail caps for major currency pairs:

• European Union (ESMA product intervention): 30:1, with tiered limits of 20:1, 10:1, 5:1 and 2:1 for non-major pairs, gold, equity indices, individual equities and cryptocurrencies
• United States (CFTC 17 CFR 5.9): 2% margin for major pairs, equivalent to about 50:1; 5% for non-major pairs, about 20:1
• Japan (Financial Services Agency): 25:1
• Australia (ASIC, since 2021): 30:1

Note that brokers registered offshore often offer leverage far above these levels, at the cost of different investor protection and dispute resolution channels. The cap itself is a form of risk warning from the regulator.

Calculating margin usage

Margin equals notional value divided by leverage. Using the 14 October 2026 EUR/USD close of 1.1151, one standard lot has a notional value of 111,510 dollars:

• At 30:1, margin = 111,510 / 30, approximately 3,717 dollars
• At 50:1, margin = 111,510 / 50, approximately 2,230 dollars
• At 200:1, margin = 111,510 / 200, approximately 558 dollars

Higher leverage means less margin committed, but the impact of the same price move on equity is unchanged. If price moves 100 pips against you (0.0100), the loss is a fixed 100 x 10 = 1,000 dollars. At 30:1 that is 26.9% of the margin committed; at 200:1 it is 179%. That is the danger of high leverage: it does not amplify price movement, but it sharply compresses the time you have to withstand it.

How liquidation happens

When account equity falls below the maintenance margin the broker requires, a margin call is triggered. If equity continues to fall to the liquidation level, the broker closes positions forcibly, usually starting with the largest loss. The remaining margin is released, but the floating loss has already become realised.

Two concepts need separating: margin used, the capital committed to open positions, and free margin, the capital not yet used. The less free margin you have, the less able the account is to absorb movement.

The mathematics of drawdown: why losses are harder than gains

Drawdown and recovery are not symmetrical. A 10% loss requires an 11.1% gain to break even; a 20% loss requires 25%; a 50% loss requires 100%; an 80% loss requires 400%. That asymmetry means controlling drawdown takes priority over chasing return.

What actually happens to retail accounts

When the European Securities and Markets Authority introduced its product intervention measures, it compiled retail data from member states showing that between 74% and 89% of retail CFD accounts lost money. The EU also requires brokers to disclose the actual loss rate of their own clients in marketing. That figure is not a prediction about any individual, but it does show that without risk constraints, losing is the norm rather than the exception.

Lesson summary and self-check

• Leverage is a mechanism, not a source of return; margin is capital set aside, not a cost.
• Retail caps on major pairs: EU 30:1, United States about 50:1, Japan 25:1, Australia 30:1.
• Margin = notional value / leverage; the loss from a given price move does not depend on leverage.
• Drawdown is asymmetric: a 50% loss needs a 100% gain to recover.

Self-check: (1) How much margin does one standard lot of EUR/USD use at 50:1? (2) Why does raising leverage not raise the expected return of a trade?