Leverage & Margin
Leveraged trading lets you open a position larger than the funds you put up for it. This page explains how leverage and margin work, and why they increase both potential gains and potential losses.
What is leverage?
Leverage allows you to control a position with a market value larger than the amount of money in your account. It is usually shown as a ratio, which describes how large a position can be compared with the margin required to open it.
Because your profit or loss is based on the full size of the position, not only on the margin you set aside, leverage magnifies both gains and losses. A small price movement against your position can lead to a loss that is large in relation to your margin, and you can lose all of the money in your account.
What is margin?
Margin is the amount of money from your account that is set aside as a deposit while a leveraged position is open. It is not a fee or a cost of the trade: it is returned to your available balance when the position is closed, adjusted for any profit or loss.
Your trading platform shows several related figures: used margin (the funds held for open positions), free margin (the funds available to open new positions or absorb losses) and margin level (your equity divided by your used margin, expressed as a percentage).
How margin is calculated
In general terms, the margin required to open a position is the trade size multiplied by the current price, divided by the leverage applied:
Required margin = trade size × price ÷ leverage
The higher the leverage, the less margin a position requires, but the same price movement still has the same effect on the full position. Margin is usually calculated in the instrument's currency and converted to your account's base currency.
Worked example (hypothetical)
- Trade size: 100,000 units of a currency pair
- Price: 1.2000
- Position value: 100,000 × 1.2000 = 120,000
- Leverage: 1:100
- Required margin: 120,000 ÷ 100 = 1,200
In this illustration, a 1% price move against the position would cause a loss of about 1,200, equal to the whole margin set aside for it. The numbers are rounded and chosen only to show how the formula works.
Margin call and stop-out
If your open positions move against you, your equity falls and so does your margin level. When the margin level drops to a set threshold, a margin call occurs: this is a warning that your account no longer has enough margin to support your open positions. You may be able to restore your margin level by depositing funds or closing positions.
If the margin level keeps falling and reaches the stop-out level, positions are closed automatically until the margin level is back above the stop-out level. In fast-moving markets, positions may be closed at a worse price than expected.
Managing risk with leverage
Using the maximum leverage available is not required. Choosing a lower effective leverage reduces the size of your positions relative to your account and the effect that each price movement has on your equity. The practices listed here can help you manage risk, but they cannot remove it.
- Consider placing stop-loss orders to limit the loss on a position. Stop-loss orders are not guaranteed and may be filled at a worse price when the market gaps.
- Size each position according to the amount you are prepared to lose, not according to the maximum your margin allows.
- Monitor your margin level and free margin regularly, especially while positions are open during volatile periods.
- Understand overnight financing (swap) costs, which are charged or credited on positions held past the daily cut-off and can add up over time.
- Be aware that margin requirements can change, for example before weekends, holidays or major announcements.
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