Leverage and Margin Explained

What leverage is in forex

Leverage is a ratio. It tells you how large a position you are allowed to hold for a given amount of your own money.

At 1:100, $1,000 holds a position worth $100,000. At 1:30 the same $1,000 holds $30,000. At 1:500 it holds $500,000.

Leverage is often described as borrowing, and that description causes confusion. Nothing is transferred to you and there is no loan to repay. The broker sets aside part of your balance as security and lets you hold a position larger than that amount. The ratio is a permission, not a resource.

The point most beginners get wrong: leverage does not change how much you gain or lose per pip. That is decided by position size alone. A 1.00 lot position on EUR/USD is worth about $10 a pip at 1:30, at 1:100 and at 1:500. What changes is how much of your balance is locked up while you hold it.

What margin is and how it is calculated

Margin is the portion of your own money set aside and frozen while a position is open. It is not a fee and it is not paid to anyone. Close the position and the margin is released back into your balance.

Required margin is the full value of the position divided by the leverage ratio:

Required margin = (contract size × lots × price) ÷ leverage

One standard lot of EUR/USD at 1.0850 is a position worth $108,500.

The position is the same size in all three rows. The exposure is the same, the pip value is the same, and only the amount of your money held as security changes.

If position size and pip value are not yet clear, pips, lots and contract size sets them out first. Leverage makes little sense until that part does.

How leverage changes the money you can lose

Because higher leverage frees up more of your balance, it lets you open a bigger position than you otherwise could. That is the whole mechanism, and where the danger sits.

Take a $1,000 balance. At 1:30, the largest EUR/USD position it supports is roughly 0.27 lots, about $2.70 a pip, so a hundred-pip move against you is around $270. At 1:500, the same $1,000 supports roughly 4.60 lots, about $46 a pip, and the same hundred-pip move is around $4,600 — more than the account holds.

The leverage figure did not make the market move further. It removed the constraint that would have kept the position small. Read high leverage as the absence of a limit rather than as extra capacity.

What free margin and margin level mean

Four numbers sit on your platform, and everything that follows is driven by them.

• Balance is your money with no open positions counted.
• Equity is your balance plus or minus the running result of everything open. It is the live figure.
• Used margin is the total set aside as security for open positions.
• Free margin is equity minus used margin: what remains to absorb losses and open anything new.

From those comes the number that decides your account’s fate:

Margin level = (equity ÷ used margin) × 100

If your equity is $2,000 and $1,000 is held as margin, your margin level is 200%. As a position moves against you, equity falls, used margin stays where it is, and the margin level falls with it. Watch this figure rather than the running profit-and-loss column. It is the one the platform acts on.

What a margin call and a stop-out actually do

Brokers set two thresholds on the margin level. Common figures are 100% for the margin call and 50% for the stop-out, but they differ by broker and account type. Find your own account’s figures before you trade, not during.

The margin call is the first threshold. When your margin level falls to it, you are warned and can no longer open new positions. That is all it is: a notification and a restriction. It does not close anything, it does not stop the loss, and in a fast market you may see it and the stop-out within the same minute. Treat it as the last point at which the decision is still yours — close, reduce size, or add funds.

The stop-out is the second threshold, and it is not a warning. When your margin level reaches it, the platform begins closing your open positions automatically, usually the largest losing one first, until the margin level is back above the threshold. You are not consulted. Positions close at whatever price the market is offering at that moment, which in a violent move can be considerably worse than the stop-out level implies.

A stop-out is not a safety net placed there for you. It is the point at which the platform stops a position from consuming margin that is no longer there. Two consequences follow, and neither is comfortable:

• The loss is realised. A position closed at a stop-out is closed. If the market reverses ten minutes later, you are no longer in it.
• The stop-out cannot act on a price that never trades. Markets gap — over a weekend, on a rate decision, on unscheduled news. Price can jump straight past your stop-out level, and positions then close well below it. Whether an account can go below zero in that situation depends on the terms of the account you hold. Read them rather than assume.

A stop-out is also not the same thing as a stop-loss. A stop-loss is an instruction you place yourself, at a price you chose, before the trade goes wrong. A stop-out is what happens when you did not.

Why a higher leverage account is not a bigger account

Choosing 1:500 over 1:100 does not add money to your balance. It removes a ceiling. Everything below it — position size, pip value, the distance a move must travel to empty the account — stays in your hands.

So decide position size from the risk you are willing to take on the trade, not from the largest size the platform will accept. That is what position sizing and the 1% rule is for. Leverage then becomes what it should be: a background setting governing how much margin is tied up, rather than a dial setting how quickly an account can end.

Available leverage, the margin requirement per instrument, and the margin call and stop-out levels are set per account type, and are listed for the dynamic leverage policy alongside its other conditions.

Worked example: a 1.00 lot position on GBP/USD at 1:100

Your balance is $2,000, leverage is 1:100, and you buy 1.00 lot of GBP/USD at 1.2500.

The position is worth 100,000 × 1.2500 = $125,000, so required margin at 1:100 is $1,250. That leaves:

• Used margin: $1,250
• Free margin: $750
• Margin level: 2,000 ÷ 1,250 × 100 = 160%
• Value of one pip: about $10

Now follow the price down.

At the margin call, 100%. Equity must fall to $1,250. That is $750 of loss, which at $10 a pip is 75 pips, so GBP/USD at 1.2425. You are warned and blocked from opening anything new. The position stays open and keeps losing.

At the stop-out, 50%. Equity must fall to $625. That is $1,375 of loss, or 137.5 pips, so GBP/USD at 1.2362. The platform closes the position at whatever price is available. Around $1,375 of your $2,000 is gone, plus the spread you paid on entry, leaving roughly $625.

The number to sit with is 137.5 pips. On GBP/USD that is an ordinary day — not a crisis, not a shock announcement, just a normal session’s range. A single position, opened at a size the platform was willing to accept, took most of the account on a day nobody would call unusual.

Run the same trade at 0.10 lots. Required margin is $125, one pip is worth about $1, and 137.5 pips against you costs about $138 rather than $1,375. The trade is no more correct at the smaller size. The difference is that an ordinary move against you costs $138.

Key takeaways

• Leverage sets the maximum position your balance can support; it has no effect on what a pip is worth once the position is open.
• Margin is your own money frozen as security for the position, released when you close it, and calculated as position value divided by the leverage ratio.
• A margin call is a warning that blocks new positions; a stop-out closes your positions automatically at whatever price is available, and the loss is realised.
• A stop-out is not a stop-loss and it cannot protect you through a gap, so the size you choose when opening the trade is the real control.

Frequently asked questions