Leverage and margin explained, with a worked example

How leverage lets you control a large position with a small deposit, what margin, free margin and margin level mean, and why stop outs happen.

Beginner Lesson 3 of 10 · 3 min read

⚠️ Risk warning: CFDs and leveraged forex are complex instruments with a high risk of losing money rapidly. Most retail accounts lose money. This content is education only, not investment advice or a recommendation.

Leverage of 1:100 on one lot of EUR/USDPosition you control100,000 EUR ≈ $111,500Margin$1,1151:100Account balance $5,000$5,000 − $1,115 = $3,885 freeA 1% move against you costs:−1% × $111,500 = −$1,115
Leverage of 1:100 on one lot of EUR/USD

Leverage is the feature that makes CFD and forex trading accessible with a small account. It is also the main reason most retail accounts lose money. Understand it before you use it.

Leverage and margin

With leverage of 1:100, every $1 in your account can control $100 of market exposure. The money the broker sets aside to keep the position open is the margin (the “required margin”). It is not a fee; it is returned when you close, plus or minus your profit or loss.

Worked example

Your balance is $5,000. You buy 1 lot of EUR/USD (100,000 euros) at 1.1150, so the position is worth about $111,500. At 1:100 leverage the required margin is $111,500 ÷ 100 = $1,115. Your free margin (what is left to absorb losses or open more trades) is $5,000 − $1,115 = $3,885.

A 1% fall in EUR/USD (about 112 pips) costs roughly $1,115, more than a fifth of your account, from a move that happens in many weeks.

Equity, free margin and margin level

  • Equity = balance + open profit or loss.
  • Free margin = equity − used margin.
  • Margin level = equity ÷ used margin × 100%.

Brokers set two thresholds. At the margin call level (for example 100%) you get a warning and usually cannot open new trades. At the stop out level (for example 50%) the platform starts closing your positions automatically, biggest loser first. The exact levels are in your broker's terms.

How much leverage is sensible?

The leverage your broker offers is a ceiling, not a target. In the EU and UK, regulators cap retail leverage at 1:30 on major currency pairs and lower on other assets. Whatever your limit, what really matters is position size: risk a small, fixed share of your account on each trade (see risk management). Many brokers also offer negative balance protection, which stops your account going below zero in a fast market; check whether yours does.

✍️ Quick quiz

Check what you learned. Your answers stay in this browser.

1. With 1:50 leverage, what margin does a $50,000 position need?

Show answer

$1,000. $50,000 ÷ 50 = $1,000.

2. Your equity is $2,000 and used margin is $1,000. What is your margin level?

Show answer

200%. Margin level = equity ÷ used margin × 100% = 200%.

3. What usually happens when the margin level reaches the stop-out level?

Show answer

The platform starts closing positions automatically. At stop out the platform closes positions to stop the account falling further.

4. Which statement about margin is true?

Show answer

It is set aside while the trade is open and released when you close. Margin is collateral. It is released on closing, adjusted by your profit or loss.