Leverage and Margin: The Double-Edged Sword
Leverage amplifies both gains and losses. Learn how margin works, margin calls, and how to use leverage safely. What leverage really costs, and the sizing.
What Is Leverage?
Leverage lets you control a large position with a small deposit. 100:1 leverage means $1,000 controls $100,000. In CFD trading, leverage is typically 30:1 for major forex, 20:1 for minor forex, 10:1 for indices, and 5:1 for stocks.
How Margin Works
Margin is the collateral required to open a leveraged position. Required margin = position size / leverage. For a $100,000 position at 30:1 leverage: margin = $100,000 / 30 = $3,333. Your account must have at least $3,333 to open this trade.
Margin Call and Stop Out
- Margin call: When your equity falls below the required margin, the broker warns you to deposit more or close positions
- Stop out: When equity falls below a percentage of required margin (typically 50%), the broker automatically closes your positions
- At stop out, you lose the position AND the broker may charge a close-out fee
Using Leverage Safely
- Effective leverage = position size / account equity. Keep it under 5:1
- Don't max out your margin — leave 70%+ of your account as free margin
- Use stop losses on every trade — without them, leverage can wipe your account in one move
- Lower leverage during high volatility (news events, market opens)
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70-80% of retail investor accounts lose money when trading CFDs. Backtesting does not guarantee future results. Always consider whether you can afford the potential loss of your capital.