Leverage, Margin and Risk

Leverage lets you open a position larger than the margin you set aside. A small price change can have a large effect on your account, in either direction. This lesson explains the relationship between position size, margin, and risk.

7 min read · Beginner friendly

What is Leverage?

Leverage is the ratio between a position’s value and its required margin. At 1:100, a $100,000 position requires $1,000 in margin before any additional account requirements.

What is Margin?

Margin is the amount reserved to support an open position. It is not a trading fee. Higher leverage reduces the margin required for a position of the same size, but does not reduce its market risk. Free margin is the equity remaining after used margin.

Margin = Lots × Contract size × Price ÷ Leverage

The Margin and Pip Calculator uses illustrative contract assumptions and the price you enter. It is a learning tool. Check your platform for the actual contract size and margin requirement before trading.

The Double Edge

At 1:100 leverage, a 1% adverse move in the value of a position is equal to its initial margin, before costs. For a fixed position size, changing leverage changes required margin, not the cash gain or loss from a price movement.

Managing Your Risk

Start by deciding how much loss you can afford. Position size, available equity, and the distance to an intended exit all affect your exposure.

A Stop Loss can help manage a trade, but its execution price is not guaranteed. Some traders use 1% to 2% of account equity as a risk-planning example; this is not a guarantee of safety or a personal recommendation. Monitor your free margin and the risk across all open positions.

Margin Call and Stop-Out: A margin call indicates that account equity is low relative to required margin. At the broker’s stop-out threshold, positions may be closed automatically. Thresholds vary by account, and a stop-out does not guarantee that any funds will be left in your account. Negative balance protection applies to your account, so your losses will not exceed the funds in it.

Key Takeaways

Leverage lets a small deposit control a much larger position (e.g. 1:100).
Margin is the portion of your funds reserved to open a trade.
Larger positions produce larger gains or losses for the same price movement.
Plan position sizes and exits, remembering that Stop Loss orders can slip.
Watch your free margin to avoid a margin call or stop-out.

Try the calculator, then check the actual requirements in your trading platform.

Open the Calculator

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