What leverage is
Leverage lets you control a position worth more than the money you put up. At leverage of 1:20, $1,000 controls a $20,000 position. The money you put up is called margin.
How margin is calculated
Margin = price x contract size x lots / leverage. One lot of gold is often 100 ounces. At a price of 2,000 the position is worth $200,000, so at 1:20 the margin is $10,000 and at 1:100 it is $2,000.
Leverage multiplies both sides
Profit and loss are calculated on the full position, not on the margin. A 1% move against a $200,000 position loses $2,000, which is a fifth of a $10,000 margin. That is why leveraged trading can empty an account quickly.
Margin calls and stop outs
If losses reduce your equity below the broker maintenance level, you receive a margin call and must add funds. If equity keeps falling, the broker closes positions automatically at a stop out level.
Limits and futures
Regulators cap leverage for retail clients. In the European Union the cap has been 20:1 for gold and 10:1 for other commodities such as oil, and rules differ elsewhere. Exchange futures use fixed margin per contract set by the exchange, which can rise when markets become volatile.
Using leverage carefully
The risk of a trade depends on lot size and stop distance, not on the leverage setting. Many traders choose position size from the amount they are willing to lose, then check that the margin is comfortably below their balance.
Related:Margin calculatorPosition size calculatorStop loss and position sizing
Educational content, not investment advice.