Understanding Leverage and Margin

Leverage is a powerful tool that can amplify gains AND losses. Learn to use it responsibly.

What is Leverage?



Simple Explanation

• Borrowed capital from your broker
• Trade larger positions with less money
• Expressed as ratios (1:100, 1:500)

Example

• You have $1,000
• With 1:100 leverage, control $100,000
• 1% move = $1,000 (100% of your account)

Understanding Margin

Margin Defined

• Amount broker holds as collateral
• Portion of your capital reserved
• Calculated based on position size and leverage

Margin Terminology

• Used Margin: Locked in open positions
• Free Margin: Available for new trades
• Margin Level: Equity / Used Margin x 100%
• Margin Call: Warning that account is low

The Danger of High Leverage

Why Traders Blow Accounts

• Using maximum available leverage
• No room for normal market movement
• One bad trade wipes everything
• Emotional trading with large positions

Safe Leverage Guidelines

Recommended Approach

• Beginners: Use 1:10 to 1:30 effective leverage
• Intermediate: Up to 1:50
• Position size based on risk, not leverage

The 1-2% Rule

• Never risk more than 1-2% per trade
• Leverage allows it, but discipline prevents it
• Calculate position size FIRST, ignore max leverage

Margin Call Prevention

1. Use appropriate position sizes
2. Always set stop losses
3. Keep free margin above 200%
4. Do not over-trade (multiple large positions)
5. Understand your broker margin requirements