Understanding Margin and Leverage
Leverage amplifies both profits and losses. Most traders understand the profit side. Far fewer understand what happens when leverage works against them.
What Is Leverage?
Leverage allows you to control a large position with a small amount of capital. A broker offering 1:100 leverage means you can control $100,000 of currency with $1,000 of your own money. This is expressed as a ratio — 1:50, 1:100, 1:500.
What Is Margin?
Margin is the capital your broker requires you to deposit to open and maintain a leveraged position. It is not a fee — it is collateral. If you open a $100,000 position with 1:100 leverage, your required margin is $1,000 (1% of the position value).
The Margin Call Mechanism
If your position moves against you and your account equity falls below the broker's margin requirement threshold, you will receive a margin call — and potentially have your positions automatically closed at a loss.
Example: Account = $5,000. Position size = 1 standard lot EUR/USD (margin required = $1,000 at 1:100 leverage). If EUR/USD moves 400 pips against you, your floating loss is $4,000. Your equity is now $1,000 — equal to your margin requirement. Margin call.
The Professional Approach to Leverage
Professional traders do not use maximum leverage. They size positions based on risk percentage of account equity, which naturally limits the effective leverage used. A trader risking 1% of a $10,000 account ($100) on a 20-pip stop loss uses 0.5 mini lots — an effective leverage of approximately 5:1, not 100:1.
High leverage does not give you a bigger edge. It gives you less time to be right before you are wiped out.