Leverage, margin and stop-outs
Lesson 14 · about 11 min
Leverage is how a retail account trades $100,000 of euros with $3,000 in the bank. It is also the mechanism by which most retail FX accounts are emptied. The risk management course covers the principle; this lesson does the FX-specific arithmetic so the numbers on your platform stop being mysterious.
Notional, margin and leverage
Three quantities, one relationship:
- Notional is the full value of the position: units of base × price, in the quote currency (then converted to your account currency).
- Margin is the deposit the broker holds against that position.
- Leverage is notional ÷ margin, or equivalently margin = notional ÷ leverage.
Example. Buy 0.50 lots (50,000 units) of EUR/USD at 1.0850 in a USD account.
- Notional = 50,000 × 1.0850 = $54,250.
- At 30:1 leverage, margin = 54,250 ÷ 30 = $1,808.33.
- At 50:1, margin = $1,085.
- At 500:1, margin = $108.50.
The position is identical in every case. A one-pip move changes its value by $5.00 whether the broker asked for $1,808 or $108 as margin. Leverage never changes what you make or lose per pip; it changes how much of your own money the broker requires you to keep next to the trade.
| Leverage | Margin required for $54,250 notional | Margin as % of notional |
|---|---|---|
| 10:1 | $5,425 | 10% |
| 30:1 | $1,808 | 3.33% |
| 50:1 | $1,085 | 2% |
| 100:1 | $542.50 | 1% |
| 500:1 | $108.50 | 0.2% |
The account numbers on the platform
Every FX platform shows the same set of figures:
- Balance: cash in the account, ignoring open positions.
- Equity: balance plus the floating profit or loss on open positions.
- Used margin: the sum of the margin held against open positions.
- Free margin: equity minus used margin. This is what you can open new positions with.
- Margin level: equity ÷ used margin × 100%.
Example, continued. Account balance $5,000. You open the 0.50-lot EUR/USD trade at 30:1.
| Moment | Balance | Floating P/L | Equity | Used margin | Free margin | Margin level |
|---|---|---|---|---|---|---|
| Just after entry | 5,000 | 0 | 5,000 | 1,808 | 3,192 | 277% |
| Down 100 pips | 5,000 | −500 | 4,500 | 1,808 | 2,692 | 249% |
| Down 400 pips | 5,000 | −2,000 | 3,000 | 1,808 | 1,192 | 166% |
| Down 638 pips | 5,000 | −3,192 | 1,808 | 1,808 | 0 | 100% |
| Down 819 pips | 5,000 | −4,096 | 904 | 1,808 | −904 | 50% |
Margin call and stop-out
Two thresholds are written into the broker's terms:
- Margin call level, often 100%. When margin level falls to it, the platform warns you and will not let you open new trades.
- Stop-out level, often 50% under ESMA/FCA rules, and anywhere from 20% to 100% elsewhere. When margin level falls to it, the broker starts closing your positions automatically, usually the largest loser first, until margin level is back above the threshold.
In the example, stop-out at 50% arrives when equity is $904, that is, after a loss of $4,096, or 82% of the account. The broker's "protection" kicked in when there was almost nothing left to protect.
Now redo it at 500:1. Used margin is $108.50. Margin level hits 50% when equity is $54.25, a loss of $4,945.75, or 98.9% of the account. Higher leverage did not make the trade riskier per pip; it let you sit in the losing trade longer before the broker stepped in, and left less at the end.
| Leverage | Used margin | Equity at 50% stop-out | Loss at stop-out | Pips against you (at $5/pip) | Account left |
|---|---|---|---|---|---|
| 10:1 | $5,425 | n/a: margin exceeds balance, trade rejected | |||
| 30:1 | $1,808 | $904 | $4,096 | 819 | 18% |
| 50:1 | $1,085 | $542.50 | $4,457.50 | 892 | 11% |
| 100:1 | $542.50 | $271.25 | $4,728.75 | 946 | 5% |
| 500:1 | $108.50 | $54.25 | $4,945.75 | 989 | 1% |
Notice that even at 30:1 the stop-out is 819 pips away on a pair whose ADR is around 70. No sane stop is anywhere near it. The stop-out is the broker's protection against you owing them money. It is not, and was never meant to be, your risk management. Your stop is.
Key idea: Margin is a deposit, not a cost and not a risk limit. Leverage changes how much deposit the broker asks for and where the forced liquidation sits; it does nothing to the loss per pip. Size from your stop, and the leverage in use will take care of itself.
The leverage you are actually using
The advertised figure is the maximum. The number that matters is:
effective leverage = total notional of open positions ÷ equity
In the example, $54,250 ÷ $5,000 = 10.85:1. That is high for a 0.50-lot trade on a $5,000 account and it is a direct result of sizing by "how much can I afford" instead of by the stop. Size the same trade from a 40-pip stop at 1% risk: $50 ÷ 40 = $1.25 per pip, so 12 micro lots, notional $13,020, effective leverage 2.6:1. Margin at 30:1 is $434, margin level after entry is 1,152%, and a stop-out is not a thing you will ever think about.
| Sizing method | Lots | Notional | Effective leverage | Loss at a 40-pip stop | Loss as % of account |
|---|---|---|---|---|---|
| "Max the margin" at 30:1 | 1.38 | $150,000 | 30:1 | $552 | 11% |
| "Half a lot feels right" | 0.50 | $54,250 | 10.85:1 | $200 | 4% |
| From the stop, 1% risk | 0.12 | $13,020 | 2.6:1 | $48 | 0.96% |
Why the caps exist
The regulatory leverage caps from Module 1 (50:1 US, 30:1 UK/EU/Australia) are there because regulators measured what happened to retail accounts at 200:1 and 500:1 and found that the great majority lost, faster. A cap does not stop a trader oversizing; it only limits how far. The right response to "this offshore broker gives 1000:1" is to notice that you would never use it, so it buys you nothing except a counterparty with weaker rules.
Try it: On a demo account, open a position sized so that used margin is about half your balance. Note the margin level. Then place a stop 40 pips away and calculate, by hand, the margin level at the stop. Then close it and re-open the position sized from a 1% risk on that same 40-pip stop. Compare the two margin levels. Keep the second one.
Recap
- Margin = notional ÷ leverage; it is a deposit, not a cost, and leverage does not change the loss per pip.
- Equity, used margin, free margin and margin level (equity ÷ used margin) are the four numbers to watch.
- Margin call (often 100%) blocks new trades; stop-out (often 50%) force-closes positions, typically after most of the account is gone.
- Stop-out is the broker's protection, not yours; your stop and your sizing are your protection.
- Effective leverage = total notional ÷ equity; size from the stop and it stays low without trying.