Beginner · Lesson 8 of 11 · 7 min read
Leverage and margin
Leverage lets a small deposit control a much bigger trade. It is the reason trading can grow an account quickly, and the main reason so many accounts are wiped out.
What leverage is
With leverage, your broker lets you open a trade worth far more than the money you put down. At 30:1, every £1 in your account can control up to £30 of a market. Profits and losses are worked out on the full size of the trade, not on the deposit.
So with £1,000 and 30:1 leverage you could control £30,000 of EURUSD. A 1% move then makes or loses £300, which is 30% of your account from a move that happens most weeks.
Leverage is a ceiling, not a target. How much you can lose is set by your stop and your position size, not by how much leverage the broker allows. Size every trade so the stop loses 1% or less.
Margin in plain English
| Word | What it means |
|---|---|
| Margin | The deposit set aside to keep a trade open. At 30:1 it is about 3.33% of the trade size. |
| Free margin | Money left over to absorb losses or open new trades. |
| Margin level | Your equity divided by the margin in use, as a percentage. The lower it gets, the closer you are to trades being closed. |
| Margin call | A warning that your account is running low compared with the margin your trades need. |
| Close-out | The broker closing your trades for you because there is not enough money left to keep them open. |
The UK limits
For everyday (retail) traders, FCA-regulated brokers must limit leverage on CFDs and spread bets. Brokers can set lower limits than these.
| Market | Most leverage allowed | Margin needed |
|---|---|---|
| Major currency pairs (e.g. EURUSD, GBPUSD) | 30:1 | 3.33% |
| Other currency pairs, gold and major stock indices | 20:1 | 5% |
| Other commodities (e.g. oil) and smaller indices | 10:1 | 10% |
| Individual shares | 5:1 | 20% |
| Crypto | CFDs and spread bets on crypto cannot be sold to UK retail traders | |
The same rules also mean an FCA-regulated broker must close your trades once your money falls to half of the margin they need, and you cannot lose more than the money in your account (negative balance protection). Brokers based outside the UK offering 500:1 usually give you none of this.
Two traders each have £2,000. Trader A opens £40,000 of EURUSD because the leverage allows it. A 1% move against them costs £400, which is 20% of the account, and a bigger move could see the trade closed out.
Trader B uses the same broker and the same leverage, but sizes the trade so the stop loses £20, which is 1%. Same leverage on offer, completely different risk. The difference is position size, not leverage.
Common mistakes
- Using all the leverage on offer because it is there.
- Opening trades without a stop and relying on the margin close-out instead.
- Adding more money to save a losing trade from being closed.
- Choosing an offshore broker just for higher leverage.
Check yourself
1. You have £1,000 and control £30,000 of a market. What does a 1% move against you cost?
£300, which is 30% of your account.
2. What is the most leverage a UK retail trader can get on a major currency pair?
30:1, and brokers can set less.
3. What really decides how much you lose on a trade: the leverage or your stop and position size?
Your stop and position size.
Try it on BTM
For education only, not financial advice. Trading carries a high risk of losing money, especially with leverage. Only trade with money you can afford to lose.
For educational purposes only. Nothing here is financial advice. Past performance does not guarantee future results, and trading carries a high risk of losing money, so only trade with money you can afford to lose. Read the risk warning.