Leverage and margin in forex, explained
How leverage decides how much of your deposit a trade locks up, what margin level, free margin and a margin call really mean, and why a larger position enlarges losses exactly as much as gains — with every number worked out step by step.
In forex, leverage lets you open a position larger than your deposit, and margin is the part of your deposit set aside to keep that position open. With 1:100 leverage, a $100,000 position needs $1,000 of margin. They are one mechanism seen from two sides: leverage is the ratio, margin is the money it locks.
Leverage does not change what a pip is worth — position size does. What it changes is how large a position your deposit can open, and how much room is left before a margin call warns you and a stop out starts closing your trades.
What is leverage in forex, and what is margin?
Leverage is a ratio such as 1:10 or 1:100. It tells you how many units of position each unit of your own money can control. At 1:100, every $1 of deposit can hold $100 of currency.
Margin is the other side of the same ratio: the amount the broker sets aside from your account while a trade is open. At 1:100 that is 1% of the position; at 1:10 it is 10%. The rest of the position is not borrowed cash sitting in your account — it is exposure the margin secures.
Two points trip up most beginners. Margin is not a fee: it is released back to your free funds the moment the trade closes, plus or minus the result. And margin is not the most you can lose: losses come from the full position size, not from the slice that was set aside.
The position — and so the profit or loss per pip — is identical in all four rows. Only the amount of deposit it locks changes.
If lots and pips are still new, the beginner’s guide to forex covers them first.
How to calculate margin in forex
The required margin for any trade comes from one line of arithmetic:
Position size = lots × 100,000 units of the base currency, converted into your account currency at the current price.
Why the two examples differ
Margin is measured on the base currency — the first one in the pair. In EUR/USD you control 100,000 euros, so their value in dollars depends on the price: at 1.0850 they are worth $108,500. In USD/JPY the base currency is already the dollar, so one lot is exactly $100,000 whatever the price.
Smaller trades scale down in proportion. A mini lot (0.1) of EUR/USD at 1:100 needs $108.50; a micro lot (0.01) needs $10.85. Most platforms show the required margin in the order window before the trade is confirmed.
Watch margin move with live prices
A free demo account uses real market prices and virtual money. Open a trade and see used margin, free margin and margin level change tick by tick, without risking anything.
Used margin, free margin and margin level
Once a trade is open, the account panel shows five related numbers. Take an account with a $2,000 balance and one open trade that uses $1,000 of margin — Example B above.
| Figure | How it is worked out | Just opened | Down $500 |
|---|---|---|---|
| Balance | Settled cash, no open results | $2,000 | $2,000 |
| Equity | Balance ± open profit or loss | $2,000 | $1,500 |
| Used margin | Margin locked by open trades | $1,000 | $1,000 |
| Free margin | Equity − used margin | $1,000 | $500 |
| Margin level | Equity ÷ used margin × 100 | 200% | 150% |
Spread, commission and swap are left out to keep the numbers round; on a real account they also move equity.
What margin level tells you
Margin level is the health reading of the whole account: equity divided by used margin, times 100. It falls when open trades lose, and it drops sharply when more margin is committed. The balance does not move until a trade is closed, which is why traders watch equity and margin level instead of balance.
The 100% and 50% marks are common examples, not universal rules: each broker sets its own levels, and they can differ by account.
Notice the row at 100%: equity equals used margin, so free margin is zero and there is nothing left to open another trade with. Below that, free margin turns negative. Both TradeLocker and MetaTrader 5 show these figures live in the account panel, although the labels differ slightly between the two platforms.
What is a margin call, and what is a stop out?
They are two thresholds on the same scale, and they do very different things.
In the example above, a broker with those levels would warn at $1,000 of losses and start closing at $1,500. The trader does not choose the exit price of a stop out: the position closes at whatever the market offers at that moment.
Why the levels vary
Margin call and stop-out levels differ between brokers, and sometimes between account types at the same broker. Some set the margin call at 100%, others higher or lower; stop outs are commonly somewhere around 50% or below. The numbers that matter are the ones on your account, which is why experienced traders look them up before their first leveraged trade.
A stop out is not a guaranteed exit price. When the market gaps — over a weekend or on a major data release — price can jump straight through the stop-out level, and positions close at a worse level than the percentage suggests. Keeping margin level far from the threshold is what gives a trade room to breathe.
How leverage magnifies profits and losses
Here is the counter-intuitive part: the leverage setting on its own does not make a trade riskier. A mini lot of EUR/USD gains or loses $1 per pip whether the account runs at 1:20 or 1:100. At 1:20 it locks $542.50 of margin; at 1:100, $108.50. The profit or loss is identical.
What leverage does is let a small deposit open a large position. The measure that captures this is effective leverage: total position size divided by equity. Two traders with the same $2,000 account and the same 1:100 setting can be running completely different risks:
100 pips on EUR/USD is a move of a little under 1%. Margin level after the move = remaining equity ÷ used margin × 100.
Trader A has barely noticed the move. Trader B has lost half the account on a move of under 1%, which a major pair can make in a single busy day, and is already below a 100% margin call; fewer than 46 more pips against the position would take equity down to $542.50, the point where a 50% stop out would close it.
The arithmetic runs in reverse too: 100 pips in B’s favour would have added $1,000. Higher leverage lets you open a larger position, and a larger position makes every move count more, in both directions, without improving the odds of being right.
How traders keep margin under control
Traders who use leverage for years tend to share a handful of habits that keep margin level well away from the danger zone:
- Size from the stop loss, not from free margin — the question is how much a trade can lose, not how big a position the account allows. The guide to calculating position size walks through it.
- A stop loss on every position, so a loss is closed by a plan long before it is closed by a stop out.
- A wide margin buffer — many traders keep margin level several times above their margin call level, so an ordinary move cannot come near it.
- An eye on effective leverage: several small trades on correlated pairs can add up to one large position.
- Extra care around gaps — weekends and major releases are when price can skip past a stop or a stop-out level.
Margin requirements also differ by instrument: at many brokers, metals, indices and crypto carry higher margin than major pairs. It is worth checking the conditions for the markets you plan to trade, and how leverage is set on each of the HeroFX account types, before sizing a live position.
Choose the account, then choose the size
Compare the Zero Commission, Raw Spread, 100% Bonus, Hero10X and Islamic accounts, practise on the free demo and go live only when the margin maths feels routine.
Key takeaways
- Leverage and margin are one mechanism: at 1:100 the margin is 1% of the position, at 1:10 it is 10%.
- Margin = position size ÷ leverage. One lot of EUR/USD at 1.0850 and 1:100 needs $1,085.
- Margin level = equity ÷ used margin × 100. At 100%, free margin is zero and no new trades can be opened.
- Margin call and stop-out levels vary by broker and account, and a gap can close positions beyond them.
- Position size, not the leverage setting, decides how much a pip is worth — and how fast an account can be wiped out.
Leverage and margin FAQs
What is leverage in forex?
Leverage is the ratio between the size of a position and the margin needed to open it. At 1:100, $1,000 of margin controls a $100,000 position. It allows positions far larger than the deposit, so profits and losses become larger relative to the deposit, in both directions. Leverage does not change what a pip is worth; the size of the position does.
What is the difference between leverage and margin?
They describe the same thing from two sides. Leverage is the ratio, such as 1:50; margin is the actual money set aside to keep the trade open, which at 1:50 is 2% of the position. Higher leverage means less margin per trade. Margin is not a fee: it is released when the position closes.
How do you calculate margin in forex?
Divide the position size by the leverage. Position size is the number of lots times 100,000 units of the base currency, converted into your account currency. One standard lot of EUR/USD at 1.0850 is $108,500; at 1:100 the margin is $108,500 ÷ 100 = $1,085. A mini lot would need $108.50. Most platforms show this figure before the order is placed.
What is free margin in forex?
Free margin is equity minus used margin: the money still available to open new trades or absorb losses on open ones. With $2,000 of equity and $1,000 used, free margin is $1,000. It shrinks as open trades lose, and when it reaches zero the margin level is 100% and no new positions can be opened.
What is a good margin level in forex?
There is no single correct figure: it depends on the broker’s margin call and stop-out levels and on market volatility. What matters is the distance from those thresholds. Many traders keep their margin level several times higher than the margin call level, so an ordinary daily move cannot bring it near a forced close.
What happens when you get a margin call?
A margin call means margin level has fallen to the broker’s warning threshold. The platform alerts you, and new trades are usually blocked because free margin is exhausted. Nothing is closed yet; traders typically reduce positions or add funds. If losses continue, the stop-out level is next.
What is a stop out in forex?
A stop out is the margin level at which the platform starts closing positions automatically, usually the largest losing trade first, until margin level recovers. The level is set by the broker and can vary by account type. In fast markets or after a gap, positions can close at a worse price than the stop-out level implies.
Does higher leverage mean more risk?
Not by itself. The same position risks the same amount per pip at 1:20 or 1:100; higher leverage only locks less margin. The risk appears when that freed-up margin is used to open bigger positions, raising effective leverage. That is why many traders set position size from their stop loss rather than from what the account allows.