You are not doing anything with *“every 500 dollars”.*

Broker leverage – whether it’s 50:1, or 500:1, or 1000:1, or some other number – is **a limit to how high you can scale up your position size.** It can be compared to the credit limit on your *Visa* card.

If *Visa* told you that your credit limit was a million dollars, you wouldn’t be asking “what am I using for every million dollars”.

And you certainly would not start making million-dollar purchases, just because *Visa* said you could use that much credit. Instead, you would use your credit card to purchase things you know you can pay for, when the bill comes in. You would probably be using a tiny fraction of the huge credit limit on your card.

In the same way, when you trade prudently in your forex account, you are using only a portion of the maximum allowable leverage offered to you by your broker. If your broker has offered you a huge leverage limit, then you – as a prudent trader – will be using only a *tiny fraction* of that huge leverage limit.

Very high maximum allowable leverage is not a bad thing. It’s a good thing. I have often said that I would like to have 10000:1 maximum allowable leverage, because then my required margin on every trade would be almost zero (1/100 of 1%, to be exact).

**That’s the thing to focus on.**

Be glad for the highest maximum allowable leverage you can get. Then, you can forget about leverage altogether!

**When you choose your position sizes in a prudent manner, the leverage you actually use will take care of itself.**

Before anything else, establish the RISK you are willing to take in each trade, as a percentage of your account balance. Then, determine where a stop-loss should logically be placed, based on what your charts are showing you. Then, enter the parameters you have selected into the Position Size Calculator, and let the calculator do the math for you.

Unless you are a scalper, basing your position sizes on a risk-percentage of 5% or less will prevent any difficulty with your broker’s maximum allowable leverage. **However, if you are an inexperienced trader, 5% risk is way too much – limit your risk on each trade to 1%,** until you figure out what you are doing, and until you have become consistently profitable trading tiny positions.

Let’s run through a typical example.

Suppose you have an account denominated in USD, your account balance is $1,000, your broker’s maximum allowable leverage is 500:1, and your account allows you to trade in increments of 1,000 units of currency (micro-lots). And suppose you choose to trade the EUR/USD at the current price of 1.1964 (for this example, it doesn’t matter whether you are trading LONG or SHORT). Finally, let’s say you have determined (from chart analysis) that your stop-loss should be 37 pips away from your entry price.

Just for fun, let’s say that you are an experienced trader, willing to take more risk than your friends, who are all novices – So, you decide to risk 5% of your account on this trade.

Five percent of $1,000 is $50. So, that would be your loss, if your trade goes bad and you get stopped-out. But, you are an experienced trader, and you are very confident about this trade you are about to take. So, you’re not worried about your $50 risk.

Let’s determine the **position size** that meets your criteria, and then let’s figure the **actual leverage** you are using in this trade.

After we plug all the required numbers into the Position Size Calculator, we get this result: The maximum position size corresponding to your inputs is 13.5135 micro-lots – which you will *round down* to **13 micro-lots,** so as not to exceed the maximum.

Thirteen micro-lots of EUR/USD has a notional value of €13,000. At the current price of EUR/USD = 1.1964, the equivalent notional value in USD is 13,000 x 1.1964 = $15,553.20.

So, you are using your $1,000 account to take a position worth $15,553.20 – and, clearly, **you are using a little more than 15½:1 actual leverage.** Even with this relatively high-risk trade, you are using nowhere near the maximum allowable leverage (500:1) on your account. Furthermore, because of your stop-loss, and the very low required margin on your trade, **margin-calls are not a consideration.**

*For true scalpers,* the leverage situation can be radically different. True scalpers place, and close, trades too quickly to be bothered with things like position size calculators. True scalpers trade huge positions, looking for small pip gains, while *risking* even smaller numbers of pips.

If we were to plug a true scalper’s numbers into the Position Size Calculator, it might look like this: Account currency USD, Account balance $1,000, Risk percentage 5%, **Stop-loss 3 pips,** Currency pair EUR/USD.

The Calculator would tell us that the scalper has $50 at risk, just as in the example above.

But, the scalper is trading a position size more than 10 times as large as in the example. Specifically, the scalper is trading 166 micro-lots – *which means that the scalper is actually using a little more than 198:1 actual leverage* (166 micro-lots = €166,000 = $198,602.40 at the current EUR/USD price).

**What if you trade with less risk than the 5% in the example above?**

At 4% risk, your hypothetical trade in the example above would use a little less than 12:1 actual leverage. The scalper’s trade would use slightly more than 159:1 actual leverage.

At 3% risk, your trade would use a little more than 9½:1 actual leverage. The scalper would use a little less than 120:1 actual leverage.

For practice, you can figure the actual leverage used in these two different trades, if the risk percentage is 2%, and then 1%.

As the wall-of-text above illustrates, in any discussion of leverage, it’s always critical to know which type of leverage is being mentioned: *maximum allowable leverage,* or *actual leverage used.*