Home / Course / Module 2 / Forex Leverage and Margin: How Exposure Is Magnified
Module 2 · Lesson 4 of 7Leverage lets a small deposit control a much larger position. That magnifies both gains and losses, so understanding margin maths is essential before you place a trade.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Educational content only. Nothing here is a recommendation, and no result is guaranteed.
Leverage is the use of borrowed exposure to control a larger position than your own money would allow. It is shown as a ratio. At 30:1 leverage, each $1 of your money supports $30 of position size.
The money you set aside to open and hold a position is called margin. Think of it as a good faith deposit held by your broker, not a fee. It is released when you close the trade, adjusted for profit or loss.
An analogy: putting down a 10 percent deposit to secure a house. You control the whole house, but if its value falls, the loss falls on the full value, not just your deposit.
Leverage multiplies gains and losses by the same factor. A small price move against a leveraged position can wipe out a large share of your account, and leveraged CFD trading can lose money quickly.
The formula is simple:
Required margin = position value / leverage. Position value = units x price (in your account currency).
Note that margin is not the amount you can lose. Your potential loss can exceed the margin, as the next section shows.
Your platform shows several figures that all connect.
Brokers set margin level thresholds. A margin call is a warning (or restriction on opening new trades) when margin level falls to a set percentage. A stop out is when the broker automatically closes positions, usually starting with the biggest loser, because your equity can no longer support them.
Thresholds differ between brokers, so find your broker's figures. The key point is that stop out is automatic and may happen at a bad moment, such as a fast news spike. In fast markets the price can gap or slip, so the actual closing price can be worse than expected.
Many UK and European regulators require negative balance protection for retail clients, which means you cannot lose more than your account balance. Rules change and vary by country and firm, so check the regulator's website and your broker's terms.
Because leverage is risky, retail leverage is capped by regulators in the UK and Europe. The caps are lower for volatile or less liquid instruments (for example, 30:1 for major currency pairs and lower for gold and exotics under ESMA-style rules). Exact limits can change, so always check the FCA or relevant regulator's website.
More on position sizing is in Gold Trading Risk Management and on exits in Stop Loss and Take Profit.
The next example connects leverage to account impact. All numbers are hypothetical.
That last line is the heart of leverage: a price move of under 1 percent cost 15 percent of the account. A smaller lot or a tighter, sensible stop reduces this effect, which is why sizing is decided from the risk you accept, not from the maximum the platform allows.
No. Higher leverage only lets you take bigger positions on the same deposit, which raises the chance of large and fast losses. Many experienced traders use far less than the maximum.
It is a rule or feature that stops a retail client losing more than the money in their account. Whether it applies depends on your broker and regulator, so check.
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