What is trading?
FOUNDATIONS: COURSE 1 | LESSON 3
Leverage and margin in practice
Learning objectives
By the end you can calculate required margin, free margin and margin level for any position on your account.
By the end you can predict, before opening a trade, how far the market must move to trigger a margin call or stop-out.
By the end you can distinguish account leverage (a setting) from effective leverage (your actual exposure) and manage the one that matters.
D1.5 gave you the honest concept of leverage. This lesson gives you the working machinery: the four numbers on your platform's account bar — balance, equity, margin, free margin — what they mean, how they move, and how to make sure the ugly ones never matter. By the end, nothing on that bar will be mysterious, which is exactly how it should be before real money goes anywhere near it.
The account bar, decoded
Open a position on MT4/MT5 and the terminal shows a row of numbers. Here's each one, using a running example: a $1,000 account at 1:100 leverage, buying 0.10 lots of EUR/USD at 1.0850 (exposure ≈ $10,850).
- Balance — $1,000. Your realised money: deposits plus closed-trade results. It does not move while trades are open.
- Margin — $108.50. The deposit locked to hold the position: exposure ÷ leverage = $10,850 ÷ 100. Think of it as "reserved", not "spent" — you get it back when the trade closes, minus or plus the result.
- Equity — balance + floating P/L. The truthful value of your account right now. If your trade is 20 pips up (+$20), equity is $1,020; 30 pips down, $970. Equity breathes with every tick.
- Free margin — equity − margin. What's left to open new positions or absorb losses. Here at open: $1,000 − $108.50 = $891.50.
- Margin level — equity ÷ margin × 100%. The health gauge brokers act on. At open: $1,000 ÷ $108.50 ≈ 922%. Very comfortable.
Two thresholds to know for your specific account type (they vary — check yours): a margin call commonly triggers at 100% margin level (warning: no new positions, add funds or close something), and stop-out commonly at 50% (the broker force-closes positions, biggest loser first).
How far away is disaster? Compute it before you trade
Here's the calculation that turns anxiety into arithmetic. For our example account, at what price does stop-out hit?
Stop-out at 50% margin level means equity = 50% × $108.50 = $54.25. Equity falls from $1,000 to $54.25 when the floating loss reaches $945.75. At $1/pip (0.1 lots), that's a 946-pip adverse move — EUR/USD falling from 1.0850 to about 0.9904. A multi-month catastrophe move. This position is genuinely conservative: effective leverage here is $10,850 ÷ $1,000 ≈ 11:1 — modest even though the account setting is 1:100.
Now re-run the numbers with 1.0 lot ($108,500 exposure, $1,085 margin — note that's more than the account… so the platform rejects it. Try 0.9 lots: margin $976.50, free margin a paper-thin $23.50, effective leverage ~98:1). Stop-out equity = $488.25, reached after a floating loss of $511.75 = 57 pips at $9/pip. Fifty-seven pips is an ordinary Tuesday on EUR/USD. Same account, same leverage setting, and the survivable move shrank from 946 pips to 57 simply through position size.
That's the whole game in one comparison. Run this "pips to stop-out" calculation (the widget below does it live) before any trade where you're unsure. If the answer is under a few hundred pips on a major, you're overexposed — full stop.
Account leverage vs effective leverage
The 1:100 on your account is a ceiling: the maximum the broker lets you borrow. It determines only how much margin gets locked per lot. Your actual risk profile is effective leverage = total exposure ÷ equity, and it's set by you, through position size:
| Position (on $1,000, 1:100) | Exposure | Effective leverage | Pips to stop-out (~) |
|---|---|---|---|
| 0.02 lots | ~$2,170 | ~2:1 | >4,000 |
| 0.10 lots | ~$10,850 | ~11:1 | ~946 |
| 0.50 lots | ~$54,250 | ~54:1 | ~146 |
| 0.90 lots | ~$97,650 | ~98:1 | ~57 |
A higher account-leverage setting isn't automatically reckless — 1:500 with 0.02 lots locks less margin and leaves more free margin than 1:30 with the same position. Danger doesn't live in the setting; it lives in the exposure you choose. The setting just determines how much rope the platform will sell you. Regulated entities cap retail leverage in many jurisdictions (e.g. 1:30 on majors under several regulators) precisely because, given rope, beginners climb.
Also remember from F1.2: margin is not your risk number. Your risk is stop distance × pip value. Margin is just the deposit that must be free for the platform to accept the order. A trade can require $108.50 of margin while risking only $20 (20-pip stop, 0.1 lots) — or, with no stop, risking your whole account. Margin measures capacity; stops and sizing measure risk.
Hedged positions, multiple trades and weekend margin
Real accounts rarely hold one position, so three practical notes:
- Margins add up. Three 0.1-lot positions lock ~$325 of margin on our example account. Free margin absorbs the combined floating loss — correlated positions (long EUR/USD + long GBP/USD, say) can draw it down together, faster than you'd expect. Treat correlated trades as one bigger trade.
- Floating losses hurt equity even when "you haven't lost yet". An open −$300 makes your equity $700 regardless of your hopes for a bounce. Margin level is computed on equity, not on optimism.
- Margin requirements can rise around weekends and major news — some brokers raise them temporarily because gap risk is higher. If you run tight free margin into a Friday close, a weekend margin increase alone can push you toward stop-out territory. Leave headroom.
The habit to build from today, on demo: after every position you open, glance at three numbers — free margin, margin level, and your computed pips-to-stop-out — and confirm all three are boring. Boring is the goal. Excitement on the account bar means the sizing lesson didn't stick.
Key takeaways
Balance is realised money; equity = balance + floating P/L; margin is locked deposit; free margin = equity − margin; margin level = equity/margin — the number brokers act on.
Know your account's margin-call (~100%) and stop-out (~50%) thresholds, and compute pips-to-stop-out before trading, not during.
Account leverage is a ceiling that sets margin per lot; effective leverage (exposure ÷ equity) is the risk you actually chose via position size.
Margin is not risk: stops and sizing define risk; margin defines capacity. Confusing them leads to both false fear and false safety.
Multiple correlated positions share one pool of free margin and can drain it together; leave headroom, especially into weekends and news.