Leverage and margin explained for beginners
By Forexuro Desk. Education, not financial advice. All guides
Leverage lets a trader control a large position with a small deposit, and it is the single biggest reason forex and CFD trading is so risky. This guide explains leverage, margin, margin calls and stop outs in plain language, with worked examples.
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What leverage is
Leverage is borrowed exposure. With leverage of 30 to 1, a deposit of 1,000 controls a position worth up to 30,000. Your gains and losses are calculated on the full position size, not on the deposit, so every price move is magnified relative to the money you put up.
Brokers usually express leverage as a ratio, such as 30:1, or as a margin requirement, such as 3.33%. The two describe the same thing: 1 divided by 30 is about 3.33%.
What margin is
Margin is the deposit your broker sets aside to keep a leveraged position open. It is not a fee. It is part of your own money, locked while the trade is open.
Required margin = position value ÷ leverage
Worked example: one standard lot of EUR/USD is 100,000 euros. With EUR/USD at 1.1000, the position is worth 110,000 US dollars. At 30:1 leverage, the required margin is 110,000 ÷ 30, about 3,667 dollars. At 20:1 it would be 5,500 dollars. Our margin calculator works this out for any pair or gold.
Retail leverage limits
Many regulators cap the leverage that brokers can offer retail clients. In the European Union, ESMA's 2018 measures set limits that vary with the volatility of the market. The UK FCA adopted similar rules for retail CFD clients.
| Market (ESMA retail limits) | Maximum leverage | Minimum margin |
|---|---|---|
| Major currency pairs | 30:1 | 3.33% |
| Non major currency pairs, gold, major indices | 20:1 | 5% |
| Commodities other than gold, non major indices | 10:1 | 10% |
| Individual shares | 5:1 | 20% |
Rules differ by country and by broker, and some offshore brokers offer far higher leverage. Higher available leverage does not mean you should use it. Source: ESMA product intervention measures.
Free margin, margin level and margin calls
| Term | Meaning |
|---|---|
| Equity | Your balance plus or minus the result of open trades. |
| Used margin | The total margin locked by open positions. |
| Free margin | Equity minus used margin: what is left to absorb losses or open new trades. |
| Margin level | Equity ÷ used margin × 100, shown as a percentage. |
| Margin call | A warning when margin level falls to the broker's threshold. |
| Stop out | The level at which the broker starts closing positions automatically. Under the ESMA rules, retail positions are closed out when equity falls to 50% of the required margin. |
Example: equity of 5,000 with 3,667 of used margin gives a margin level of about 136%. If losses reduce equity to 1,834, the margin level is about 50% and positions may be closed automatically, locking in the loss.
Effective leverage: the number that matters
The leverage your broker allows is a ceiling. What matters is the leverage you actually use: total position value divided by your equity. Opening one standard lot of EUR/USD on a 5,000 account is effective leverage of about 22:1, and a 1% move against you costs about 1,100, or 22% of the account. Opening 0.1 lots on the same account is about 2.2:1, and the same move costs about 110.
This is why position size should come from your stop loss and risk per trade, not from the margin you have available. Our risk management guide and the lot size calculator show how.
Leverage checklist
- I know the leverage and margin requirement for the market I am trading.
- I size positions from my stop loss and risk per trade, not from free margin.
- I know my broker's margin call and stop out levels.
- I check whether my account has negative balance protection.
- I keep effective leverage low, especially on gold and around major news.
Frequently asked questions
What does 30:1 leverage mean?
It means a deposit can control a position up to 30 times its size. A margin requirement of about 3.33% describes the same leverage.
Is margin a fee?
No. Margin is part of your own money that the broker sets aside while a leveraged position is open. Costs such as spread, commission and swap are separate.
What happens at a stop out?
When your margin level falls to the broker's stop out level, the broker starts closing positions automatically, which turns open losses into realised losses.
Related: from demo to live trading covers what to check before you trade with real money.
Related reads
Next guide: Forex order types explained
Market, limit, stop and stop limit orders, plus stop loss and trailing stops.
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