Leverage and Margin Explained

What Is Leverage?

Leverage is the ratio between your actual capital and the size of the position you're controlling. If you have £1,000 and your broker offers 1:100 leverage, you can open a position worth up to £100,000. Your £1,000 acts as collateral — called margin — while the broker effectively lends you the rest.

This sounds powerful, and it is. But it works in both directions. A 1% gain on a £100,000 position earns you £1,000 — a 100% return on your margin. A 1% loss costs you £1,000 — your entire margin. Leverage doesn't change the market. It changes the scale of your outcome.

What Is Margin?

Margin is the deposit required to open and maintain a leveraged position. There are two types you'll encounter:

• Initial margin — the amount needed to open a new position
• Maintenance margin — the minimum balance needed to keep the position open

If your account balance falls below the maintenance margin level, you'll receive a margin call — a notification that you need to deposit more funds or close positions. If your balance drops further to the stop-out level, the broker will automatically close your positions to prevent further losses.

How to Calculate Your Real Exposure

Before entering any trade, calculate your actual exposure — not just the margin required. If you're using 1:50 leverage on a £2,000 account, your maximum exposure is £100,000. A 2% adverse move costs you £2,000 — your entire account.

The formula is straightforward: Position size × Price movement = Profit or loss. Always run this calculation before you trade. Know your worst-case scenario before the market tells you.

Using Leverage Responsibly

Professional traders rarely use their maximum available leverage. Using 1:10 or 1:20 when 1:100 is available isn't a sign of timidity — it's risk management. Lower effective leverage means wider stop-losses, smaller position sizes, and more room for the trade to develop without triggering a margin call.

A useful rule: never risk more than 1-2% of your total account on a single trade. This keeps you in the game through inevitable losing streaks and prevents any single trade from causing serious damage to your account.