Leverage and margin explained without the sales pitch

The distinction that clears everything up

Take a gold position of 0.10 lots. Whether your account is on 1:100 or 1:500 leverage, a ten-dollar move in gold produces the same profit or loss: roughly one hundred dollars. Leverage has not changed the position at all.

What changes is the margin the broker requires to hold it. At 1:100, the required margin is a larger share of the position's notional value than at 1:500. So higher leverage means you need less capital to hold the same position — and, critically, that you can hold a much larger position with the same capital.

Where the real danger is

The risk does not come from leverage itself. It comes from what people do with it: use the freed-up margin to hold a position far larger than their account would otherwise allow.

An account with $1,000 and 1:500 leverage can hold a position whose per-point loss is large relative to the account. The same position on 1:20 leverage would be impossible to open, which is why the lower leverage setting is effectively a position-size limit enforced by the broker rather than by discipline.

Margin, free margin and margin calls

• Margin is the collateral locked while a position is open.
• Equity is your balance plus or minus open profit and loss.
• Free margin is equity minus margin already used — the amount available for new positions.
• A margin call happens when equity falls far enough that free margin runs out.
• A stop-out closes positions automatically at a level set by the broker, which may be well below where you intended to exit.

Why the automated close is the part that matters

The uncomfortable property of a margin call is that it is triggered by account arithmetic, not by whether your view of the market is right. A perfectly reasonable position can be closed at the worst possible moment because a temporary fluctuation consumed the free margin.

This is why sizing that leaves substantial free margin is not merely conservative. It is the difference between a drawdown you can analyse and a position that is closed for you before your analysis has had a chance to be right or wrong.

A practical rule

Ignore the leverage your broker advertises and decide position size from the stop distance and the money you are prepared to lose, as described in our sizing guide. Then check the required margin against your free margin, and if the position uses more than a modest fraction of it, reduce the size.

Leverage is then simply a constraint you have to satisfy, rather than a number that decides how much you trade. Traders who work this way are indifferent to whether the account is on 1:100 or 1:500, because the decision was never made from the leverage figure in the first place.