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