Leverage and margin explained

What leverage means

Leverage allows you to gain market exposure using a smaller amount of your own funds. A leverage ratio of 1:100 means that every $1 of required margin supports $100 of position value. You are still exposed to price changes across the full position, not just the amount set aside as margin. This can amplify both gains and losses relative to your funds.

Higher leverage reduces the margin required for a given position; it does not make that position safer. If position size stays the same, the same price movement produces the same monetary profit or loss, regardless of leverage. Xellion offers leverage up to 1:2000 depending on the account. The maximum available leverage is not a recommendation about how much exposure to take.

What margin means

Margin is the amount your broker requires to support an open position. It is not a transaction fee or a maximum possible loss. While the position remains open, this amount is committed to supporting it rather than being freely available for other positions. When the position closes, its margin requirement is released, while any realised profit, loss and costs affect your balance.

For a simple forex example, required margin equals position value divided by the leverage ratio’s second number. At 1:100 leverage, a $10,000 position would require $100 of margin. Actual calculations can depend on the instrument, account currency and applicable margin rules. In MT5, check the symbol’s contract specifications and relevant account information rather than assuming that every instrument uses the same calculation.

Worked example: EURUSD

Assume a hypothetical USD account, EURUSD at 1.1000 and a position of 0.10 standard lots. One standard lot is 100,000 units, so this position represents €10,000, worth $11,000. With 1:100 leverage, required margin is $11,000 ÷ 100 = $110. For clarity, this example ignores the spread, commissions, financing charges and other adjustments.

On EURUSD, one pip is worth $10 for one standard lot, so it is worth $1 for 0.10 lots. A 20-pip move against this position therefore creates a $20 loss. A 20-pip move in its favour creates a $20 profit. Neither calculation uses the $110 margin amount: price movement and position size determine the result.

If the same position instead used 1:1000 leverage, its required margin would be $11,000 ÷ 1,000 = $11. The same adverse 20-pip movement would still lose $20, which exceeds that margin. This shows why margin is not a loss limit, and why a smaller margin requirement should not be confused with a smaller financial risk.

Reading your account figures

In MT5, balance generally reflects deposited funds and completed trading results, excluding unrealised results on open positions. Equity reflects your account’s current value, including those unrealised results. Used margin supports your open positions, while free margin is generally equity minus used margin. These figures change as markets move, even when you do not open or close another trade.

Continuing the example, suppose your starting balance is $500 and the only position requires $110 margin. After an unrealised $20 loss, equity is $480 and free margin is $370. Margin level is equity divided by used margin, multiplied by 100: $480 ÷ $110 × 100 ≈ 436.4%. This percentage helps show how much equity supports the required margin.

Margin calls and stop-out

If losses reduce equity, free margin and margin level can fall. A margin call may indicate that the account no longer meets a required margin threshold; do not assume you will receive a personal warning. At the applicable stop-out threshold, the broker may automatically close positions. Thresholds and closure procedures depend on the account and relevant rules, so check them before trading.

Automatic closure does not guarantee a particular exit price, especially during fast markets or price gaps. CFDs are leveraged products and carry a high risk of loss. Before placing an order, understand the position’s full exposure, its pip or point value and the effect of adverse price changes on equity. The next lesson introduces market, limit and stop orders.