Here are margin and leverage explained in plain terms. Margin is the deposit your broker holds to keep a trade open; leverage is how many times larger the position is than that deposit. In the UK, retail leverage on CFDs is capped between 30:1 and 2:1, and leverage magnifies losses as much as gains.
Quick answer: what is the difference between margin and leverage?
Margin is the money set aside to open and hold a leveraged trade. Leverage is the full position size divided by that margin, so a 3.33% margin means 30:1 leverage. What you lose depends on position size and stop, so size from risk first.
How to use margin and leverage: our September 2017 post
We first published this post in September 2017. The original words and dollar examples are kept below; broker promotions and dead video prompts are removed.
Let us imagine we have a single Gold contract which consists of 100 troy ounces. If the price of Gold is $1,000 per ounce, we have a contract value of $100,000. This amount of money would seem unobtainable to the newbie trader or even most established part time traders, but many traders can afford this type of contract thanks to margin and leverage.
Margin
Margin is essentially a promised deposit – Promised meaning it is not paid upfront and deposit meaning that you must have a minimum amount of money/equity in your brokerage account. There are two types of margin, initial margin and maintenance margin. The initial margin is the amount of money that must be in your account to open the buy or sell (short) a given financial instrument. The maintenance margin is the amount of money you must hold within your account whilst your buy or sell trade remains open.
The margin required to open/keep a position varies by market, and by broker, but is often only a few percent of the contract value. This is an advantage if you don’t have access to the full equity required to open a trade, meaning you can have a lot more positions open at any given time. So, using our previous Gold contract example, to enter this trade with a 10% margin, you would only require $10,000 in your account at any given time.
Margin does have its downsides. You must remember that you still own an investment worth $100,000. Having enough equity to place a trade and being able to afford a trade are two completely different things.
For example, a reduction in Gold prices of 5% would mean you would lose $5,000 on your initial investments. You must have had at least $10,000 to place this trade, but if you total account size was $20,000, you would have lost 25% of your account from this one single trade. This is the difference between being able to place a trade and being able to afford the trade, and why so much emphasis is placed on risk management.
Leverage
This is the ability to buy/sell a financial instrument with only a fraction of the equity, and although it is like margin it is not the same.
Leverage is based on multiplications of your initial investment. Let’s say you are buying a GBPJPY pair and you want $60,000 worth. This is a lot of money to hand over at any one time, especially when this money could be invested in other places.
That’s where leverage comes in. If you can receive a leverage of 1:100, or 100 to 1, you only need to spend $600 on this $60,000 investment. This means you can use the remaining $59,400 on other investments, making your capital work best for you.
However, leverage is a doubled edge sword and can either make or break you. Using the same example and assuming you have a $2000 account size let’s say GBPJPY is trading at 140.00 and you purchase $60,000 at this time. Using only $600 of your total equity for the trade due to the 1:100 leverage.
If the price moves up to 145.00 you will have made $2,142 profit, doubling your account size overnight. But if it moves down to 135.00 you will have lost $2,142, blowing your account overnight. This is because the underlying value of the financial instrument purchased is the same, the only thing that changes with leverage is the amount of money you pay to open a given trade.
Learn to think in terms of risk
You’ve seen how leverage and margin can be used as a way to use your capital more efficiently, and have access to higher position sizes, but they should not be considered as standalone concepts. They are useful tools that you have access to in order to control the most important parameter of all: your risk. People get too hung up about ‘what leverage should I use’, when the reality is it makes no difference – what makes the difference is your risk . Let me give you an example.
Example
Imagine you have a $1,000 account, and you want to buy oil at $50, with your stop loss at $45. Your first question should be, ‘how much of my account am I willing to risk on this trade?’
Let’s say you settle on a 2% risk (A sensible figure), then you should risk $20 of your account on this one trade. Since your stop is $5 wide, which is 10% of your entry price, you need a $200 position – when the market drops 10%, your contract drops 10%, which is $20. You have $20 of risk.
There are many ways you can do this. You could have a $200 position with no leverage, or you can have a $20 at x10 leverage, or even a $2 position with x100 leverage. The result is exactly the same.
So next time you ask yourself ‘what leverage shall I use’, stop, and think instead ‘what is my risk, and how can I use leverage to achieve that?’
What has changed since 2017
UK retail clients can no longer use 100:1. At the 30:1 maximum, that $60,000 position would need about $2,000 of margin, and the $100,000 gold contract at 20:1 would need $5,000. In the oil example, “a $20 at x10 leverage” means $20 of margin controlling a $200 position.
UK retail leverage limits
ESMA set the tiers in its product intervention measures on CFDs in 2018, and the UK kept the same 30:1 to 2:1 range in permanent rules. The same limits apply to spread bets; see spread betting vs CFDs.
| Underlying | Maximum leverage | Minimum margin |
|---|---|---|
| Major currency pairs | 30:1 | 3.33% |
| Non-major pairs, gold, major indices | 20:1 | 5% |
| Other commodities, non-major indices | 10:1 | 10% |
| Individual shares and others | 5:1 | 20% |
| Cryptocurrencies | 2:1 | 50% |
These are maximums: brokers may ask for more, and professional clients can get higher leverage but lose some retail protections.
Margin calls, the 50% close-out and negative balance protection
The FCA’s permanent CFD rules, in force since 1 August 2019, add three retail protections to the leverage caps.
- Margin close-out. When your funds fall to 50% of the margin needed to keep your positions open, the broker must close one or more of them.
- Negative balance protection. You cannot lose more than the total funds in your CFD account.
- A standard risk warning. Each provider shows the percentage of its retail accounts that lose money.
A margin call is only a broker warning as equity nears close-out, and a fast market can get there first. Negative balance protection caps the loss at your balance, which can still be all of it.
How leverage changes position size: a worked example
Example: a hypothetical trader has £2,000 and risks 1% per trade, which is £20. They plan to buy a major forex pair with a stop 0.5% below entry.
- Size from risk. £20 ÷ 0.5% = a position worth £4,000.
- Work out the margin. At 30:1, £4,000 ÷ 30 = about £133 held as margin.
- Check the loss. If the stop is hit, the loss is £20, whatever leverage the account allows.
Now suppose they use all the leverage available: £2,000 × 30 = a £60,000 position, with the whole balance used as margin. The same 0.5% move to the stop now costs £300, or 15% of the account. Leveraged positions held overnight also pay overnight funding charges on the full position value.
Close-out comes when equity falls to 50% of the £2,000 margin, so after a £1,000 loss. That is a move of only about 1.7% against them. Our guide on how to calculate position size for forex, CFDs and spread bets gives the formula.
Common mistakes with margin and leverage
- Sizing from available margin. Size from the stop and your fixed risk per trade, then check the margin fits.
- Treating 30:1 as a target. It is a ceiling; most well-sized trades use far less.
- Trading without a stop. Leverage turns a small move into a large loss; see where to place a stop loss with price action.
- Ignoring gaps. A weekend gap can jump past your stop, so the loss can exceed what you planned.
Frequently asked questions
What does 30:1 leverage mean?
It means you can open a position up to 30 times your margin, so £100 of margin controls £3,000. Profits and losses are worked out on the £3,000, not the £100.
Can I lose more than I deposit?
Not as a UK retail client of an FCA-regulated CFD firm: negative balance protection caps losses at the funds in your CFD account. You can still lose all of them.
What leverage should a beginner use?
Ask instead, as the 2017 post does, how much you will lose if the stop is hit. Fix that at a small percentage of the account and the leverage follows.
Next steps
Our rules-based risk management model puts margin, position size and loss limits into one plan, and our UK beginner’s guide to trading forex covers the wider basics.
Building a rules-based risk model is part of our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
