Leverage and Margin: A Simple Guide with Examples
Leverage allows you to open a position larger than your account balance, while margin is the amount held to open it. A 1:30 leverage means $1,000 opens a $30,000 position, amplifying profits and losses 30 times.
Leverage is a tool that multiplies the size of your position relative to your balance. It is why forex and CFDs are so appealing, and also the primary reason most small trading accounts blow up.
What Is the Difference Between Leverage and Margin?
- Leverage: The ratio of the trade size to the amount required to open it, such as 1:30.
- Margin: The amount your broker sets aside from your balance to open the trade.
The formula: Margin = Trade Value ÷ Leverage.
A Real-World Numerical Example
One standard lot of EUR/USD equals 100,000 euros. If the exchange rate is 1.10, the position value is $110,000.
- With 1:30 leverage, the required margin = 110,000 ÷ 30 = $3,666.67.
- With 1:100 leverage, the required margin = $1,100.
The pip value for one standard lot of EUR/USD is $10, so a 50-pip move against you results in a $500 loss regardless of your leverage. Leverage does not change the pip value, but it allows you to open a position larger than your risk capacity. Calculate this yourself using our margin calculator and pip value calculator.
What Are Margin Level and Margin Call?
Margin Level = (Account Equity ÷ Used Margin) × 100. When it drops to a certain threshold, your broker alerts you (a margin call), and if it keeps falling, your positions are automatically closed (stop out). In Europe, the UK, and Australia, retail positions are closed out when the margin level reaches 50%. Try our margin level calculator.
What Are the Retail Leverage Limits?
The European Securities and Markets Authority (ESMA) introduced limits in 2018, enforced across Europe and by the UK's FCA, with Australia's ASIC adopting similar caps in 2021:
- 1:30 for major currency pairs.
- 1:20 for non-major currencies, gold, and major indices.
- 1:10 for commodities other than gold and non-major indices.
- 1:5 for individual equities (shares).
- 1:2 for cryptocurrencies.
Offshore brokers may offer leverage of 1:500 or more, which means a tiny adverse price move can wipe out an entire account.
How to Use Leverage Safely?
- Determine your position size based on risk rather than available leverage, using our position size calculator.
- Never risk more than 1% to 2% of your account balance on a single trade.
- Always use a stop-loss order.
- Choose a broker that provides negative balance protection so you never lose more than your deposited funds.
Frequently asked questions
What does 1:100 leverage mean?
It means every $1 of margin opens a $100 position, so a $100,000 trade requires $1,000 in margin.
Is higher leverage better?
No. Higher leverage allows you to take positions that are disproportionately large for your balance, accelerating losses. What matters is position size and risk management, not maximum available leverage.
How is required margin calculated?
Required margin equals the trade's total value divided by the leverage ratio. For example, a EUR/USD standard lot worth $110,000 at 1:30 leverage requires $3,666.67.