DEFINITION of Maximum Leverage
Maximum leverage is the largest allowable size of a trading position permitted through a leveraged account. Leverage means borrowing funds and then purchasing securities or investing with with those borrowed funds. Leverage increases the multitude of gains or losses on a trade and so increases the risk of a portfolio. Brokerage firms are able to establish their own rules for how much leverage they allow to be placed when their clients trade and how much collateral must be on hand.
These rules must be more stringent than Regulation T, which establishes minimum quantities of collateral that must be on hand for credit to be extended to brokerage clients. Currency trading has its own rules. Typical leverage available on currency trades through forex trading institutions ranges from 50 to 400 times. With a leverage ratio of 50, an individual with a margin deposit of $5,000 can initiate a trading position of up to $250,000.
BREAKING DOWN Maximum Leverage
Guidelines and regulations regarding a maximum allowable amount of leverage for securities trading were established due to the risky nature of trading on borrowed funds. The Federal Reserve Board established Regulation T which requires 50% of the purchase price of a security to be on deposit. Forex trading has much more relaxed standards. Typical available leverage on currency trades can be anywhere from 50 to 400 times. Exceeding or even getting close to the maximum leverage point can be an untenable situation for forex traders, since a small price movement can quickly wipe out the entire amount of equity in the trading account.