Understanding Leverage and Margin — and Understanding the Difference

Leverage and margin are closely related concepts that many new traders find confusing. They describe different aspects of the same mechanism, and understanding the distinction clearly is essential for calculating your actual risk on any trade.

Leverage vs. Margin

Leverage: The ratio between your account capital and the size of the position you are controlling. A leverage ratio of 1:100 means you can control $100,000 worth of an asset with just $1,000 of your own capital.

Margin: The actual dollar amount required in your account to open a leveraged position — the collateral the broker holds while your trade is open. At 1:100 leverage, the margin requirement is 1% of the position size ($1,000 to open a $100,000 position).

Used Margin vs. Free Margin

Used Margin: The total amount of margin currently held as collateral for open positions. This capital is temporarily “locked” and cannot be used to open new trades.

Free Margin: Your account balance minus the used margin. This is the capital available to open additional positions or absorb floating losses.

Margin Levels & Safety Mechanisms

Margin Level: (Equity / Used Margin) x 100. A healthy margin level is above 200%. A margin level below 100% means your equity has fallen below your used margin — a dangerous position.

Margin Call: When your margin level falls to a specified threshold (often 100%), the broker alerts you to deposit more funds or close positions.

Stop-Out Level: If the margin level falls further to the stop-out level (often 50%), the broker automatically begins closing your most losing positions.

An Illustrative Example

Example: Account balance $5,000. You open a $200,000 position (2 standard lots EUR/USD) at 1:100 leverage. Required margin: $2,000. Free margin: $3,000. If EUR/USD moves 150 pips against you, your floating loss is $3,000. Equity = $2,000. Margin level = 100% — your margin call level.

Key Takeaway: Leverage is the ratio of control to capital; margin is the actual money required as collateral. Monitor your margin level regularly and keep it well above the margin call threshold by sizing positions appropriately relative to your account balance.