It’s important to differentiate between your effective leverage and the maximum leverage available to you.
Your effective leverage is the ratio between the notional value of all your open trades and the amount of money in your trading account.
The maximum leverage available to you is inversely proportional to your minimum margin requirement. For example, if the maximum leverage available to you is 500:1, then your minimum margin requirement is 0.20%, since 0.20% times 500 equals 100%.
For comparison, US regulators set the minimum margin requirement for trading major currency pairs at 2.00% which allows US traders a maximum leverage of 50:1. In other words, the higher the minimum margin requirement, the lower the maximum leverage available to traders.
While regulators and brokers determine the maximum leverage available to traders, it is you as an individual trader who has the power to determine your effective leverage. Furthermore, as has been discussed much lately on the forum, studies suggest there is generally a negative correlation between the effective leverage used by traders and their profitability.
That said, it’s important to understand that the risk you personally choose to take on as a trader based on your effective leverage is not your only risk when trading forex or futures for that matter. In markets like these, where traders use leverage, you must consider the financial responsibility demonstrated by your broker.
Minimum margin requirements should be set by regulators and brokers (and in the case of futures by exchanges as well) by taking into account the perceived risk of a given currency pair. That’s why you will sometimes see them raise margin requirements due to heightened risk from geopolitical concerns.
Is it wise to trust your money with a broker that offers 500:1 leverage to attract customers with no regard for the potential risk to the firm or its clients? The danger to you, if such a broker has not required adequate margin from its clients for the risk they take on in the market, is that your own money can be at greater risk due the losses incurred by other traders and your broker.
“Only when the tide goes out do you discover who’s been swimming naked.” - Warren Buffett