Forex Margin vs Leverage: Why Your Deposit Is Not Your Loss Limit

What are margin and leverage?

Say you put $1,000 into a trading account. Then you open a EUR/USD trade worth $10,000. You do not need $10,000 for this. The broker only locks a small part of your money while the trade is open.

That locked part is the margin. If the broker asks for 2% margin, it locks 2% of $10,000. That is $200. Margin is a deposit for the trade, not a fee. It comes back when the trade closes, plus any gain or minus any loss.

Leverage compares the size of the trade with your money. A $10,000 trade on $1,000 is 10 times your money, so the leverage is 10:1. Brokers often write this as 1:10. Both mean the same thing.

The whole trade is also called your position. Its size is what counts when the price moves.

How does leverage make a small move big?

Your gain or loss is worked out on the whole trade, not on the margin. If EUR/USD falls 1% while you hold your $10,000 trade, you lose $100. That is 10% of your $1,000.

Now open a $20,000 trade with the same $1,000. That is 20:1 leverage. The same 1% move now costs $200, or 20% of your money. Double the leverage, double the loss.

It works both ways. A 1% move in your favour adds the same amount. Real trades also have costs, such as the spread, so every result is a little worse than this table.

Is margin the most I can lose?

No. Margin is not a limit on your loss. To see why, keep the trade the same and change only the margin rule.

The broker locks a different amount, but the trade is the same size. So the 1% move costs $100 in both cases. A lower margin rule does not make a trade safer. It only lets you open a bigger trade with the same money.

Be careful with adverts that say you can trade with "only $200". That is the margin. Your loss depends on the trade size and how far the price moves. It can be much more than $200.

What is a margin call?

As a trade loses, the money left above your margin gets smaller. When too little is left, the broker can ask you to add money. This is a margin call. The broker can also close your trades, and it may not wait for you.

A stop-loss order tells the broker to close your trade at a set price. It helps, but it is not a promise. If the price jumps past your level, called a gap, the trade can close at a worse price.

Can you lose more than you put in? That depends on where you live:

• In the US, the CFTC (a US regulator) warns that forex losses can be bigger than your deposit. You may be asked for more money.
• In the UK and EU, retail forex is often traded through a CFD. Retail CFD accounts have negative balance protection: you cannot lose more than the money in that account. The broker must also close your trades when your money falls to half of the margin they need.
• In Australia, retail CFD accounts also have negative balance protection, and margin close-out rules apply.

Rules change and accounts differ. Read your broker's agreement to see when it can close your trades.

How much leverage can I use where I live?

Many countries limit the leverage a broker can offer everyday traders. The limits below are for major pairs such as EUR/USD. They are a ceiling, not a target.

Look back at the first table. At 50:1, a 1% move costs half your money. At 30:1, it costs 30%. So even the legal maximum can hurt fast.

Some brokers based in other countries advertise 100:1 or more. A broker offering more than your country allows may not have permission to serve you. Check it first with the broker verification checklist.

How do I choose how much leverage to use?

Start from the loss you can accept, not from the most your broker allows. Before any trade, answer 3 questions:

1. How big is the trade? Write the trade size in dollars.
2. What would a 1% move cost? Divide the trade size by 100.
3. What share of your money is that? Compare it with your account.

Next, plan where you would exit with the risk-reward lesson. To turn price moves into money for any pair, go back to the pip value lesson. Try your numbers with virtual money before you use real money. Our forex broker comparison lists the leverage limits and protections by country.