Leverage and margin — the math
Calculate required margin and understand liquidation distance.
Lesson path
Market Foundations + Forex Mechanics
The Basics
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Calculate required margin and understand liquidation distance.
Leverage is borrowing power
Leverage is the borrowing power your broker gives you. If leverage is 50:1, you can control $50 of position for every $1 of your own money required as margin. Margin is the deposit your broker holds while the trade is open. The formula is simple: margin equals position size divided by leverage.
Example: you have a $500 account and open 1 micro lot of EUR/USD, which is about a $1,000 position. With 50:1 leverage, required margin is $1,000 divided by 50, or $20. That does not mean your risk is only $20. It means $20 is locked as margin while the position's P&L moves with the market.
Higher leverage lowers the margin requirement, which makes larger positions possible. That is the danger. Liquidation distance depends on your equity, used margin, broker close-out rules, spread, and open losses. In the U.S., retail forex leverage is commonly capped at 50:1 on major pairs and 20:1 on minors. In the EU and UK, retail caps commonly sit around 30:1 on majors. Other jurisdictions can be higher, so verify before sizing.
Recap: margin equals position size divided by leverage. Leverage changes the deposit needed to open a trade, not the need to control risk.
Knowledge check
Answer before moving on.
1. A $1,000 position at 50:1 leverage requires how much margin?
2. What is the main risk of higher leverage?
3. Which formula calculates required margin?
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