Leverage and margin: how much of the trade is yours
What you learn in 3 minutesLeverage is a ratio. It tells you how large a position your deposit can hold. Margin is the part of your own money that is locked while that position stays open. The two words describe the same arrangement from different sides: leverage sets the size, margin is the deposit behind it. This lesson works out both numbers on AUD/USD, step by step, so the figures can be checked rather than trusted.
Margin on one standard lot at 1:30 and at 1:500
| Step | Amount | Note |
|---|---|---|
| Contract size, one standard lot of AUD/USD | 100,000 AUD | A standard lot is a fixed contract size. It does not change with the rate. |
| Notional value in USD at an example rate of 0.6640 | 66,400 USD | 100,000 x 0.6640 = 66,400. AUD/USD is quoted in USD, so the position is measured in USD. |
| Margin required at 1:30 | 2,213.33 USD | 66,400 / 30 = 2,213.33. The ratio divides the notional value. |
| Margin required at 1:500 | 132.80 USD | 66,400 / 500 = 132.80. A higher ratio locks a smaller part of the position. |
| Margin at 1:500 converted into A$ at an example rate of 1.5060 | A$200 | 132.80 x 1.5060 = 200.00. This rate is an example only. The live rate varies, and the broker's own conversion rate may differ. |
The broker may round the margin figure, apply its own conversion rate, and add commission, financing or spread on top of the margin. Margin requirements can also be raised on some positions, so the figure shown on the platform is the one that counts.
The mistake people make here
The common mistake is reading leverage as buying power and treating the margin figure as the most that can be lost. Margin is only the amount locked while the position is open. Losses and gains are calculated on the full contract size, which is many times larger. A small adverse move can therefore use up the locked amount quickly, and the broker may close the position to protect the remaining balance. The safer habit is to decide the position size from the risk you are willing to take, then check what margin that size needs, not the other way around.Check yourself
One standard lot of AUD/USD at an example rate of 0.6640 is 66,400 USD. What margin does 1:100 require?
66,400 / 100 = 664 USD.
At 1:200 on the same 66,400 USD position, what is the margin, and what is it in A$ at an example rate of 1.5060?
66,400 / 200 = 332 USD. Then 332 x 1.5060 = 500.00, so A$500 at that example rate. The live rate varies.
One pip on one standard lot of AUD/USD is 10 USD. If the position moves 20 pips against you, how does that compare with the 132.80 USD margin locked at 1:500?
20 x 10 = 200 USD, which is more than the 132.80 USD locked as margin. The loss is counted on the full contract size, not on the margin.