Leverage and margin explained: how to find the margin you need and read the margin level
How leverage and margin work in forex: how to work out the required margin, how to read the margin level, and why leverage makes losses bigger too.
Published ・ MyBrokerBonus Editorial
Forex lets you trade a position larger than the money in your account. Leverage and margin make that possible. It is a handy feature, but losses grow by the same share as the position. This guide shows how to find the margin a trade needs, how to read the number that tells you how much room the account has (the margin level), and why leverage enlarges losses.
All numbers here are examples to show the method. The maximum leverage and the level at which positions are closed differ by broker and by account, so check the broker’s terms before you use an account.
What margin and leverage are
Margin is the deposit held in your account as a guarantee while a position is open. It is not the price of the trade. When you close the position, the margin becomes free money again.
Leverage is the ratio between the size of a trade and the margin it needs. With leverage of 100, you can hold a position with a margin of one hundredth of its size.
How to find the margin you need
The margin required to hold a position comes from this formula:
Required margin = position value ÷ leverage
The position value is “lots × units per lot × price”. Lots and prices are explained in lots, pips and currency units.
Position value = lots × units per lot × price. The figures are in the account currency and are made up for the example.
For the same trade, higher leverage means less margin. That only means the position size is the same for less deposit, not that the risk is smaller. If your account currency differs from the currency of the trade, the amount is converted at the current rate.
Our margin calculator does this for you when you enter the pair and the lots.
Point
The maximum leverage differs by broker, account type, symbol and account balance. Some brokers lower the limit as the balance grows. Check the actual figure in the broker's terms.
The margin level shows how much room is left
While positions are open, keep an eye on one number for the room left in the account. It is the margin level.
Margin level = equity ÷ margin in use × 100
Equity is the balance plus the floating profit or loss of the open positions. When the floating loss grows, equity falls, and so does the margin level.
Before the price moves
After a loss of 1,200
The level at which a broker closes positions is set by the broker. Bar lengths are in proportion to the figures.
If the margin level keeps falling, the broker closes positions by force at a level it has set. This is the loss-cut. The level differs by broker. Loss-cut and zero-cut explained covers how it works.
Leverage makes losses bigger too
Leverage is not a tool that only enlarges gains. When the position is bigger, the profit or loss for the same price move is bigger by the same share.
Small position
Large position, same balance
A move in your favour changes the balance by the same amounts. Leverage works in both directions.
In the large position in the figure, a 1% move against you removes half of the balance. In the small position, the same move costs 5% of it. Being able to use high leverage and being wise to use it are two different things.
Caution
Bonus credit makes the account look bigger, which can tempt you to trade larger. A larger trade also makes losses grow faster. Credit can be treated differently from cash.
Choosing the size of a trade
- Decide first how much you are willing to lose on one trade.
- Decide where your stop loss will sit and count the pips to it.
- Pick the number of lots that keeps the loss within that amount. Check the required margin afterwards.
Our position size calculator does this. Judge the room in your account not by the maximum leverage you can use, but by whether the margin level stays comfortable even if the loss runs further.
What to read next
The loss-cut level and what happens when a balance goes below zero are in loss-cut and zero-cut explained. How credit shows up in the platform is in how bonus credit looks in MT4 and MT5. The bonuses running now are collected in the bonus list.
Risks to keep in mind
Trading with leverage can lose money quickly, and in some cases the loss can exceed the money you deposited. A bonus does not change that. The calculations in this guide explain how things work and do not promise any profit. Start with small trades, and only with money you can afford to lose.
