Key takeaways
- Required margin equals notional value divided by leverage; at 30:1 it is about 3.33 percent.
- Margin level is equity divided by used margin; margin calls and stop-outs act on it.
- A move of only a few percent can trigger a stop-out at high effective leverage.
- Regional rules cap retail leverage and usually require negative balance protection; offshore entities often do not.
- Size trades from the loss you accept and the stop distance, not from the margin the broker offers.
- Keep effective leverage, total notional divided by equity, low and know your platform's thresholds.
Leverage lets you control a position much larger than the money you put up. It is the feature that makes forex and contracts for difference attractive to small accounts and the feature that ends most of them. The mechanics are simple arithmetic, but they are rarely taught with numbers, so traders learn them from a margin call. This guide works through the arithmetic step by step: how required margin is computed, what margin level measures, when a broker closes your positions and how to size trades so leverage stays a tool rather than a trap.
What leverage is, in one sentence
Leverage is the ratio between the size of a position and the margin you must hold to open it. At 30:1 you control 30 units of exposure for each unit of your own money. The broker is not lending you free money: the margin is a deposit held against the possibility that the trade loses more than you can cover, and the broker can close the position if your equity falls too far. The profit or loss is always calculated on the full position, not on the margin, which is why the same leverage multiplies gains and losses equally.
Margin, step by step
Required margin is the position's notional value divided by the leverage. Take one standard lot of EUR/USD, 100,000 euros, at a price of 1.1000. The notional value in dollars is 110,000. At 30:1 the required margin is 110,000 divided by 30, about 3,667 dollars. At 10:1 the same position needs 11,000 dollars. The higher the leverage, the smaller the margin per trade and the more positions you can open with the same balance, which is exactly the temptation.
| Leverage | Margin required (1 lot EUR/USD at 1.1000) | Share of notional | Positions possible on a 5,000 balance |
|---|---|---|---|
| 5:1 | $22,000 | 20.0% | none (balance too small) |
| 10:1 | $11,000 | 10.0% | none |
| 20:1 | $5,500 | 5.0% | none |
| 30:1 | $3,667 | 3.33% | 1 lot |
| 100:1 | $1,100 | 1.0% | 4 lots |
| 500:1 | $220 | 0.2% | 22 lots |
Equity, free margin and margin level
Three numbers on every platform describe your account. Equity is your balance plus or minus the floating profit and loss of open positions. Used margin is the margin tied up in open positions. Free margin is equity minus used margin, the room you have for new trades or for losses. Margin level is equity divided by used margin, expressed as a percentage. It is the single number brokers watch, because it measures how close you are to being unable to support your positions.
| Term | Formula | Example |
|---|---|---|
| Equity | Balance + floating profit and loss | 5,000 - 600 = 4,400 |
| Used margin | Sum of margins of open positions | 3,667 |
| Free margin | Equity - used margin | 4,400 - 3,667 = 733 |
| Margin level | Equity / used margin x 100 | 4,400 / 3,667 x 100 = 120% |
Margin call and stop-out
Brokers set two thresholds on margin level. At the margin call level, often 100 percent, the platform warns you and may block new positions. At the stop-out level, the broker starts closing positions automatically, usually the most losing first, until the margin level recovers. In the EU, the UK and Australia, rules require regulated retail brokers to close positions at no lower than 50 percent of required margin; many brokers close earlier. Offshore or professional accounts may allow stop-outs far lower, which sounds generous and means a larger loss before anything stops.
Worked example: how a small move leads to a stop-out
You deposit 5,000 and open one standard lot long on EUR/USD at 1.1000 at 30:1, using 3,667 of margin (this example keeps used margin at its opening level to stay simple; platforms may recalculate it as the price moves). The position loses when the price falls. At 1.0950 it is down 50 pips, or 500 dollars: equity is 4,500 and margin level is 4,500 divided by 3,667, about 123 percent. At 1.0800 it is down 200 pips, 2,000 dollars: equity is 3,000 and margin level is about 82 percent, well below a 100 percent margin call. At 1.0716 it is down about 284 pips, 2,840 dollars: equity is 2,160 and margin level has fallen to about 59 percent. A little lower and the position hits the 50 percent stop-out, which occurs when equity falls to about 1,833, a loss of 3,167 dollars or 63 percent of the account, from a price move of only about 3 percent.
| EUR/USD price | Move from 1.1000 | Floating loss | Equity | Margin level |
|---|---|---|---|---|
| 1.0950 | -50 pips | $500 | $4,500 | 123% |
| 1.0900 | -100 pips | $1,000 | $4,000 | 109% |
| 1.0800 | -200 pips | $2,000 | $3,000 | 82% |
| 1.0716 | -284 pips | $2,840 | $2,160 | 59% |
| 1.0683 | -317 pips | $3,167 | $1,833 | 50% (stop-out) |
Computed from the table above: floating loss divided by the 5,000 deposit.
How regulators limit leverage
After studying retail losses on leveraged products, several regulators capped leverage and added related protections. The exact limits depend on the asset and the jurisdiction, so treat the figures below as typical and check the current rules for your entity. They are not offered by all brokers to all clients: a broker may serve you from an offshore entity with higher leverage and fewer protections, and professional clients can be offered more.
| Instrument | Common retail limit in the UK, EU and Australia | Notes |
|---|---|---|
| Major forex pairs | 30:1 | Lower for exotic pairs |
| Non-major forex pairs, gold, major indices | 20:1 | Varies by regime |
| Commodities other than gold, non-major indices | 10:1 | |
| Individual shares | 5:1 | |
| Crypto-asset contracts | 2:1 where offered at all | Banned for retail clients in some regions |
In the United States, retail forex leverage is capped at about 50:1 on major pairs and lower on others, and contracts for difference are not offered to retail clients. Rules elsewhere differ, and some countries have no cap. Alongside the caps, regulated regions commonly require negative balance protection and standardised risk warnings for retail leveraged accounts.
Negative balance protection
In a violent gap, for example after a central bank surprise or over a weekend, the market can jump past your stop-out level and leave a loss larger than your equity. Negative balance protection means the broker absorbs the excess, so you cannot lose more than the funds in your account. It is required for retail clients in several regulated regions and optional elsewhere. Do not assume it exists: confirm it in the agreement of the entity that holds your account, and check whether it applies to every product.
Sizing positions so leverage stays safe
Professionals invert the question. Instead of asking how much leverage is available, they decide how much they are willing to lose on a trade, place the stop where the idea is wrong and let that distance set the position size. Leverage then only needs to be large enough to hold the position, and the effective leverage of the account, total notional divided by equity, stays modest. A simple rule is to keep total notional exposure within a small multiple of equity, even when the broker allows far more.
| Account equity | Risk per trade (1%) | Stop distance | Position size (EUR/USD, $10 per pip per lot) | Notional | Effective leverage |
|---|---|---|---|---|---|
| $5,000 | $50 | 25 pips | 0.20 lot | $22,000 | 4.4:1 |
| $5,000 | $50 | 50 pips | 0.10 lot | $11,000 | 2.2:1 |
| $5,000 | $50 | 10 pips | 0.50 lot | $55,000 | 11:1 |
A pre-trade margin checklist
- Decide the loss you accept. Express it as a percentage of equity, for example one percent.
- Place the stop where the idea fails. Use structure or volatility, not the money you want to risk.
- Compute the lot size. Risk in money divided by stop distance in pips times pip value.Tip: Round down, never up.
- Check the margin needed and free margin after the trade. The position should leave most of your equity free.
- Check the effective leverage. Total notional across positions divided by equity.Tip: If you cannot explain the number, the position is too large.
- Know the platform's margin call and stop-out levels. They are set per account and entity.
Frequently asked questions
Is higher leverage better?
It reduces the margin needed but does not change how much a trade can lose relative to its size. It mainly lets you over-size positions. Safe trading depends on position size and stops, not on available leverage.
What is the difference between margin call and stop-out?
A margin call is a warning when margin level falls to a set level. A stop-out is when the broker starts closing positions automatically at a lower level.
Can I lose more than my deposit?
Where negative balance protection applies, no. Where it does not, a gap can leave a negative balance that you owe. Check your agreement.
Why do some brokers offer 1:500 or more?
Entities in jurisdictions without leverage caps can offer it. It usually comes with weaker client protection, so consider that trade-off before choosing it.
Does leverage affect swaps?
Financing is charged on the full position size, so higher leverage that lets you hold a larger position also raises the financing amount.
How do I choose the right leverage setting?
Pick a setting low enough that you could not over-size by accident. Many platforms let you lower the account leverage; a lower setting forces smaller positions.
What is effective leverage?
Total notional value of open positions divided by account equity. It shows your real exposure regardless of the account's maximum leverage.
Do margin requirements change?
Yes. Brokers can raise margin requirements around news, weekends and volatile markets, which can trigger a margin call on an unchanged position.