Leverage and margin

Leverage lets you control a large position with a much smaller deposit. That sounds attractive, but it is also the main reason most retail CFD accounts lose money. This lesson shows you the arithmetic so you can see exactly what leverage does to your account.

Leverage and margin in plain terms

• Notional value is the full size of your position, measured in money. One standard lot of EUR/USD at 1.1000 has a notional value of 100,000 euros, which is 110,000 US dollars.
• Leverage is the ratio between that notional value and the deposit your broker requires. It is written as a ratio such as 30:1.
• Margin (or required margin) is that deposit. It is not a fee; it is a portion of your balance set aside while the trade is open.

The formula is:

Required margin = notional value ÷ leverage

Maximum leverage depends on your regulator, your client classification and the instrument. In the UK and the European Union, for example, retail clients are typically limited to 30:1 on major currency pairs and lower ratios on other instruments. Other jurisdictions set different limits, so always check your own broker's terms.

Worked example: required margin

You want to buy 1 standard lot of EUR/USD at 1.1000 (an example price) in a US dollar account.

• Notional value: 100,000 × 1.1000 = 110,000 USD

Drop to a mini lot (10,000 euros, notional 11,000 USD) at 30:1 and the margin is 11,000 ÷ 30 = 366.67 USD.

Notice what leverage does not change: the pip value. One standard lot of EUR/USD is worth 10 USD per pip whatever leverage you use. Higher leverage only lets you open a bigger position with the same money.

Why leverage magnifies losses

Imagine a 5,000 USD account that opens 1 standard lot of EUR/USD at 1.1000, using 3,666.67 USD of margin at 30:1.

Suppose the price falls 1%, from 1.1000 to 1.0890 (1.1000 × 0.99 = 1.0890).

• Move: 1.1000 − 1.0890 = 0.0110 = 110 pips
• Loss: 110 pips × 10 USD = 1,100 USD
• Share of the account: 1,100 ÷ 5,000 = 22%

A 1% move in the market has cost 22% of the account. A move of that size in a day is unusual for EUR/USD, but it does happen around major news. Gains are magnified by the same factor, which is why leverage can feel rewarding right up to the point where it is not.

Equity, free margin and margin level

Your platform tracks several figures while trades are open:

• Balance: your account value from closed trades.
• Equity: balance plus or minus the profit or loss on open trades.
• Used margin: the total margin held for open trades.
• Free margin: equity minus used margin, the amount available for new trades or to absorb losses.
• Margin level: equity ÷ used margin × 100%.

Margin calls and stop-outs

Brokers set thresholds based on margin level. The exact percentages vary, so the figures below are illustrative:

• At a margin call level (say 100%), the broker warns you and may stop you opening new trades.
• At a stop-out level (say 50%), the broker starts closing your positions automatically, usually beginning with the largest loss, to stop your equity falling further.

Worked example: when do the thresholds hit?

Continue the 5,000 USD account holding 1 lot of EUR/USD with 3,666.67 USD used margin. For simplicity, treat the used margin as fixed (in practice it shifts slightly as the price moves).

• Starting margin level: 5,000 ÷ 3,666.67 × 100% = about 136.4%
• Margin call at 100% means equity has fallen to 3,666.67 USD. The loss is 5,000 − 3,666.67 = 1,333.33 USD, or 1,333.33 ÷ 10 = about 133 pips.
• Stop-out at 50% means equity has fallen to 1,833.33 USD. The loss is 5,000 − 1,833.33 = 3,166.67 USD, or about 317 pips.

In other words, a fairly ordinary multi-day move could trigger a margin call, and the stop-out would leave you with roughly a third of the account. Prices can also gap over weekends or on news, so a stop-out may be filled well beyond the threshold. Some regulators require negative balance protection for retail clients, but you should never rely on it as a plan.

Using leverage sensibly

• Size positions from your risk per trade, not from the maximum leverage available.
• Keep plenty of free margin so normal price swings do not push you towards a margin call.
• Use a stop-loss on every trade, and remember it may not fill at your exact price.
• Treat available leverage as a ceiling, not a target.

Key takeaways

• Required margin = notional value ÷ leverage; it is a deposit set aside, not a fee.
• Leverage does not change pip value; it only lets you open bigger positions with the same capital.
• At 30:1, a 1% move against a fully sized position can cost a large share of a small account.
• Watch margin level (equity ÷ used margin); margin call and stop-out thresholds vary by broker.