Leverage and Margin Explained

What you will learn

• The meaning of margin, leverage, equity and margin level.
• The difference between a margin call and a close-out (stop-out).
• The EU retail CFD rules on leverage, margin close-out and negative balance protection.
• How to calculate how far price can move before a close-out.

Explanation

Notional value is the full market value of a position. Margin is the deposit the broker blocks to let you hold it. Leverage is notional value divided by margin. With 30:1 leverage, a €30,000 position needs €1,000 margin (3.33%).

Equity = account balance + open profit − open loss. Margin level = equity ÷ used margin × 100%. A margin call is a warning that equity is getting close to the required margin. A close-out or stop-out is when the broker automatically closes positions.

Important: leverage does not change your 1R if you size by the stop. It changes how much capital a position ties up and how quickly a large move can destroy the account if you trade too big or without a stop.

EU and German retail rules for CFDs. The European Securities and Markets Authority (ESMA) introduced temporary measures in 2018. In Germany, the Federal Financial Supervisory Authority (BaFin) made them permanent with a general administrative act dated 23 July 2019, in force since 1 August 2019. For retail clients, the maximum initial leverage is:

The rules also require: a margin close-out when equity falls to 50% of the initial margin required for open CFDs; negative balance protection, which limits your loss to the money in your CFD account; and a standard risk warning that states the percentage of the provider's retail accounts that lose money. Professional clients are treated differently. Rules can change, so check BaFin's current publications and your broker's documents.

Worked example

Hypothetical example: account €2,000. You buy 5 mini lots of EUR/USD (50,000 euros notional) via a CFD at 30:1. EUR/USD is assumed to be 1.10. Spreads, financing and fees are excluded.

1. Required margin = €50,000 × 3.33% = about €1,666.67.
2. Effective leverage on the account = €50,000 ÷ €2,000 = 25:1.
3. Close-out level = 50% × €1,666.67 = €833.33 equity.
4. Loss that triggers close-out = €2,000 − €833.33 = €1,166.67.
5. As a price move: €1,166.67 ÷ €50,000 = about 2.33% against you.
6. In pips: pip value = 50,000 × 0.0001 = $5 = €4.55 per pip → €1,166.67 ÷ €4.55 = about 257 pips.

A move of a little over 2% would remove more than half of the account. Leverage, CFDs and crypto can lose money quickly.

Common mistake

Practice activity

Account €5,000. You buy a share CFD with €10,000 notional at the 5:1 limit. Calculate the required margin, the effective account leverage, the loss that triggers close-out, and the share price fall that causes it.

Key takeaways

• Leverage = notional value ÷ margin; it ties up less capital but magnifies moves.
• EU retail CFD limits range from 30:1 (major FX) to 2:1 (crypto).
• Close-out happens at 50% of initial margin; negative balance protection caps losses at the account balance.
• Size by stop and 1R, not by available leverage.

Next step

Next you will see why several open trades can add up to one large risk, and how to limit total open risk.