Leverage and Margin
Leverage lets you control a large position with a small deposit. It amplifies losses at exactly the same rate it amplifies gains.
Leverage is the reason most traders arrive in the CFD market, and the reason a large number of them leave it. It is neither good nor bad. It is a multiplier, and multipliers work in both directions at the same rate.
The mistake is treating leverage as a way to make more money rather than as a way to reach a loss faster. Once you see it the second way, you will size positions correctly.
What leverage actually does
Leverage lets you control a notional position far larger than the capital you deposit. At 1:100, one dollar of margin controls one hundred dollars of exposure. The position's profit and loss is calculated on the full notional, not on your margin.
This is why a small price move can produce a large percentage change in your account. A 1% move on a 1:100 position is a 100% move on your margin. That is the entire mechanism, and it works identically for gains and losses.
Notional, margin, and free margin
Three numbers define your position at any moment. Notional exposure is the full market value you control. Required margin is the portion of your account locked against that exposure. Free margin is what remains available for new positions or to absorb losses.
Required margin equals notional exposure divided by your leverage ratio. If EUR/USD is at 1.1000 and you buy one standard lot, your notional is $110,000. At 1:100 your required margin is $1,100. At 1:500 it is $220.
Maintenance margin and the stop-out
Brokers set a maintenance margin level, often expressed as a percentage. If your equity falls below it, you get a margin call asking you to deposit funds or close positions.
If equity falls further, to the stop-out level, the broker begins closing your positions automatically, worst first, without asking you. This is not a punishment. It is the broker protecting itself from lending you money you can no longer cover. Understanding where your stop-out sits is basic survival.
Leverage does not improve your edge
This is the point that matters most. Leverage does not change your win rate, your average win, or your average loss per pip. It changes how much of your account each pip is worth.
If your strategy has positive expectancy, leverage lets you reach a given return with less capital — but also exposes you to a drawdown that could end you before the edge plays out. If your strategy has negative expectancy, higher leverage simply means you discover that faster. Sizing decisions should start from how much you are willing to lose, never from how much margin a position requires.
The same one-lot EUR/USD position at three leverage levels. The price move is identical; only your buffer changes.
| Leverage | Required margin | A 50-pip move against you | Outcome |
|---|---|---|---|
| 1:30 | $3,667 | −$500 | Comfortable, 14% of margin |
| 1:100 | $1,100 | −$500 | Serious, 45% of margin |
| 1:500 | $220 | −$500 | Position stopped out |
Key takeaways
- Leverage multiplies losses at exactly the rate it multiplies gains
- Required margin equals notional exposure divided by the leverage ratio
- Know where your broker's stop-out level sits before you open anything
- Size from the loss you are willing to take, never from the margin available
- Notional exposure equals position size multiplied by price
- Required margin equals notional exposure divided by leverage
- Falling below maintenance margin triggers a margin call or stop-out
- Higher leverage is not more profit, it is more speed in both directions
Sizing a position by how much margin it requires instead of by how much you are willing to lose.
Reading is not verification
Take the concept you just read and turn it into explicit rules, then test it. That is the only way to know whether it actually works.
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