Margin and Leverage Explained: How They Work and Their Limits

Leverage lets you open a position larger than your money, and margin is the part of your account the broker sets aside as collateral while that position is open. At 50:1, the maximum for major pairs in the US, moving 1 lot of EUR/USD (about $112,250) takes $2,245.00 of margin. What does not change is the result: if price moves against you, you lose on the full position size, not on the margin.

How margin is calculated

Margin = position value ÷ leverage

1 lot of EUR/USD is €100,000; at 1.1225, $112,250. At 50:1 the margin is 112,250 ÷ 50 = $2,245.00. With 0.1 lots, a tenth: $224.50.

The limits in the US and the EU

In the US, indices, gold and oil are traded through futures, where the exchange sets the margin for each contract.

Free margin, margin calls and liquidation

• Used margin: what your open positions hold.
• Equity: your balance plus or minus the open profit or loss.
• Free margin: equity minus used margin; what is left to open more or absorb losses.
• Liquidation: if equity falls below the requirement, the broker closes positions. With futures, a fast move can still leave the account negative.

The classic mistake

Thinking that if the broker lets you open 3 lots, you can. With a $10,000 account and 3 lots of EUR/USD, a 33-pip move against you is $990, almost 10% of the account. Decide the risk first and let the size follow. Margin calculator · how to size a trade.

Sources: CFTC retail forex rule (17 CFR 5.9), ESMA (2018 CFD decision). Information only, not investment advice.

A worked example: one lot of EUR/USD

A standard lot of EUR/USD is 100,000 euros. At the maximum leverage for a retail client in the EU on major pairs, 30 to 1, the margin needed is one thirtieth: 100,000 ÷ 30 = €3,333. If your account is in dollars and the euro trades at $1.10, that is about $3,667.

That margin is not what you stand to lose: it is the money the broker sets aside as collateral. What you can lose depends on the stop. With a 20-pip stop, that lot risks $200; on a $10,000 account that is 2% of capital, even though the margin tied up is 37%. That is why position size is set by risk, not by the margin available.

In the EU the broker must close your positions when your equity falls to half the required margin (ESMA’s 50% close-out rule). With little free margin, a run against you can close positions before they reach their stop.