Leverage and margin explained: margin call and stop out
โ๏ธ TradeAcademy๐ Basicsโฑ๏ธ 2 min read
Leverage lets you open a position much bigger than the money in your account. Margin is the part of your money the broker sets aside while that position is open. Understanding both protects you from the most common way beginners lose an account: a margin call followed by a stop out.
Leverage in one sentence
With 1:30 leverage, every โฌ1 of your money can control โฌ30 of a market.
Example: you buy 0.10 lot of EUR/USD = โฌ10,000 of exposure. At 1:30, the broker needs โฌ10,000 รท 30 โ โฌ333 of your money as margin. Without leverage you would need the full โฌ10,000.
Margin, equity and free margin
MetaTrader shows these numbers at the bottom of the Trade tab:
| Term | Meaning |
|---|---|
| Balance | Your money, not counting open trades |
| Equity | Balance + profit/loss of open trades, right now |
| Margin | Money set aside for your open positions |
| Free margin | Equity โ Margin: what's left for new trades or to absorb losses |
| Margin level | Equity รท Margin ร 100% |
Margin call and stop out
If your trades go against you, equity falls while the margin used stays the same, so the margin level drops.
- Margin call: a warning level (for example 100%): you can't open new trades.
- Stop out: at a lower level, the broker starts closing your positions automatically, biggest loser first. In the EU, brokers must close positions for retail clients when equity falls to 50% of the required margin.
A stop out closes trades at the worst moment, at a price you didn't choose. A stop loss placed by you is always better.
The big misunderstanding: leverage doesn't set your risk
People say "high leverage is risky". More precisely: high leverage makes it easy to open positions that are too big. Your risk on a trade is set by lot size ร stop distance, not by the leverage number.
Same trade, two leverages: 0.10 lot of gold with a $10 stop risks $100 whether your account is 1:20 or 1:500. The 1:500 account just uses less margin, which tempts you to open five more trades.
EU leverage limits for retail clients
| Instrument | Maximum leverage |
|---|---|
| Major currency pairs | 1:30 |
| Other currency pairs, gold, major indices | 1:20 |
| Other commodities, other indices | 1:10 |
| Individual shares | 1:5 |
| Cryptocurrencies | 1:2 |
EU retail clients also get negative balance protection: you can't lose more than the money in your account. Offshore brokers may offer 1:500 or more, without the same protections.
A simple rule
Choose your risk per trade first (0.5โ1% of the account), size the position from your stop (the 1% rule), and keep your margin level comfortably above a few hundred percent. If the margin warning ever appears, your positions are too big.
Our free cheat sheet shows the margin formula for gold with worked examples: download it.
๐ Free: Gold Risk Management Cheat Sheet
How to size every gold trade from your risk, plus a bonus ebook on opening your account and setting up MetaTrader 5.
Disclaimer: Not financial advice. Trading involves significant risk of loss.