What is Leverage and Margin in Forex?

Aug 13
If you are new to forex trading, you may have already heard the terms margin and leverage. They sound technical, but the concepts are not as hard as they seem. In simple words, leverage is like using borrowed money to make your trades bigger, and margin is the deposit you put down to open those trades.

These two ideas work hand in hand, and they can make your trading results grow faster. But they can also increase your risks. In this guide, we will break everything down in plain language. By the end, you will understand what they mean, how they work together, and how to use them wisely in your trading journey.

📌 Quick Answer

  • Leverage in forex lets you control a larger trade size with a smaller amount of money by borrowing buying power from your broker.
  • Margin is the portion of your funds set aside as a deposit to open and maintain that leveraged trade. Together, they allow you to trade bigger positions than your account balance alone could support, but they also increase potential risks and losses.

What is Leverage in Forex?

Leverage in forex allows you to control a large position with a smaller amount of your own money. It works because your broker “lends” you extra buying power to open bigger trades than your account balance alone could handle.

Think of it like a magnifying glass. It helps you see small details more clearly. In trading, leverage magnifies both your profits and your losses.

Example of Leverage

If you have $100 in your account and your broker offers 1:100 leverage, you can open a trade worth $10,000. This does not mean the broker gives you $10,000 to spend freely. It means you are allowed to control a $10,000 trade, but only need to keep a small part of it (the margin) in your account as a deposit.

Why Leverage Exists

Forex prices move in small amounts, often just a fraction of a cent at a time. Without leverage, it would take a lot of money to make a meaningful profit from those small changes. Leverage lets traders with smaller accounts take part in the market and potentially earn returns from even tiny price moves.

What is Margin in Forex?

Now, let's talk about the other side of the coin: margin.

If leverage is the loan, then margin is the security deposit you must put up to get that loan. Your broker needs to know you have enough money to handle potential losses on your trade. So, they "lock up" a small amount of your own money to keep the trade open. This is your margin.

Margin is not a fee or a cost. It’s simply a portion of your account balance that is set aside and held as collateral for your leveraged position.

You get it back when you close the trade, unless the trade loses enough to eat into that margin.

How Margin Works

If your broker requires a 1% margin, and you want to open a $10,000 trade, you need to set aside $100 from your account. This $100 is locked as the margin until you close the trade.

If your leverage is 1:100, the margin requirement will be 1%. If your leverage is 1:50, the margin requirement will be 2%, and so on.
leverage and margin example

Margin vs Leverage — What’s the Difference?

It is easy to confuse margin and leverage because they are closely linked. But they are not the same.

  • Margin is the money you must have in your account to open a trade.
  • Leverage is how many times bigger your trade is compared to your margin.

Quick Reference Table

Leverage Margin Requirement
1:10 10%
1:50 2%
1:100 1%
1:200 0.5%

Formula:  Margin Requirement (%) = 1 ÷ Leverage × 100

Margin and Leverage Example

Let’s walk through a simple scenario:

  • You deposit $500 into your trading account.
  • Your broker offers 1:100 leverage.
  • You decide to open a trade worth $50,000.
  • The required margin is 1% of $50,000 = $500.

In this case, your entire account is being used as margin. This means if the trade moves against you even a little, you could get a margin call very quickly.

Now imagine using only $100 of your account as margin for a smaller trade. You would still have $400 free margin left, giving your trade more breathing room.

The Connection Between Leverage and Margin

Leverage and margin are two sides of the same coin. The higher your leverage, the smaller your margin requirement. The lower your leverage, the more margin you need to open the same trade.

High leverage means you can control large trades with very little money, but it also means your account can run out of usable margin faster when the market moves against you.

What is a Margin Call?

A margin call happens when your account balance falls too close to the amount you have locked as margin. This means you no longer have enough free margin to keep your trade open.

When this happens, your broker will warn you or automatically close some or all of your positions to protect both you and them from going into negative balance.

How to avoid a margin call

  • Don't overdo it with high leverage.
  • Keep an eye on your trades and don't let a loss get too big.
  • Use risk management tools like a stop-loss order, which closes a trade automatically when it hits a certain loss amount.
  • Don't use all of your available money to open new trades. Always keep some free margin in your account.

Stop-Out Level Explained

The stop-out level is the point where your broker starts closing your trades automatically. This usually happens when your margin level falls below a set percentage, such as 20% or 50%.

Example: If your broker’s stop-out level is 20%, and your margin is $100, your account equity would need to drop to $20 before the broker starts closing positions.

Why High Leverage Can Be Risky

High leverage means a small move in the market can cause a big change in your account balance. While this can make profits grow faster, it can also cause losses to grow just as quickly.

Example:

With 1:500 leverage, a price move of just 0.2% can wipe out your entire account if you are fully invested.

Simple Formula Recap

Example: If you trade $20,000 with $200 margin, your leverage is 1:100.

Final Thoughts

Leverage and margin are key parts of Forex trading. They give you the power to trade in a huge market, but they also come with major responsibilities. By understanding what they are and how to manage them, you can build a strong foundation for your trading journey. Always remember to start small, use your risk tools, and never trade with money you can’t afford to lose. 

Over time, you will learn how to balance opportunity with safety.
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Frequently asked questions

1. What is the difference between leverage and margin?

Leverage is the borrowing power from your broker that lets you open a big trade. Margin is the small amount of your own money you have to put up as a security deposit to get that borrowing power. Leverage is the tool, and margin is the cost to use the tool.

2. Is high leverage good or bad?

 High leverage isn’t good or bad on its own—it's a tool. It can be good because it allows for higher profits, but it is bad if you don't manage your risk well. High leverage on a losing trade can lead to a quick margin call and a wiped-out account.

3. How is a margin call different from a stop-loss?

A stop-loss is a tool you set yourself to close a trade at a specific price to limit your loss. A margin call is a forced action by your broker that closes your trades when your account has lost too much money. A stop-loss is a choice, while a margin call is an automatic safety measure.

4. Can I lose more money than I have in my account?

In some cases, yes. While most modern brokers have systems in place to prevent this, a very fast market movement (called a "gap") can sometimes cause your account to go into a negative balance. This is why it’s so important to use risk management tools and to only trade with money you are okay with losing.