Leverage and margin

This lesson explains how leverage and margin work, what regulatory limits apply to retail clients in the EU, and how to calculate the distance to stop-out before you enter a trade. It is designed for someone who has seen a broker advertise high leverage and wants to know what that number actually means for account survival.

Leverage in one sentence

Leverage is the ratio of exposure to deposit. On a CFD account for a retail client in the EU, leverage limits are not a matter of broker goodwill — they come from regulation.

Leverage limits for retail clients in the EU

The ESMA product intervention package on CFDs, applied since 2018, sets maximum leverage for retail clients:

| Instrument class | Maximum retail leverage | | --- | --- | --- | | Major forex pairs | 30:1 | | Non-major pairs, gold, major indices | 20:1 | | Other commodities and non-major indices | 10:1 | | Individual stocks and other values | 5:1 | | Crypto | 2:1 |

On top of that come two elements that affect you more than the headline leverage number:

• Margin close-out at 50 per cent of required margin — the broker must close positions when funds fall to half the required margin. That is a hard level, not a broker’s mood.
• Negative balance protection — loss on a retail client account cannot exceed available funds. That means you cannot owe the broker money, but it does not mean the broker will not close your position — it will, usually earlier than you would like, at the 50 per cent margin threshold.

These limits do not apply to professional clients. Changing status to professional is sometimes advertised as access to higher leverage — in practice it is a resignation from part of regulatory protection, including the hard position close-out level and negative balance protection. If your broker proposes this status for convenience, that is not convenience.

The numbers above reflect retail client regulation; your account terms may be stricter. Always confirm current conditions in the broker’s documents. This material is educational, not investment advice.

Calculate the distance to stop-out before entering

This is the most important number in this lesson. Stop-out does not depend on what leverage the banner allows — it depends on how far price can move against you before margin falls to 50 per cent.

1. starting_deposit     = 10,000 units (example)
2. required_margin      = exposure / leverage
3. close_out_threshold  = 50% × required_margin
4. buffer               = starting_deposit − close_out_threshold
5. distance_to_stop_out = buffer / value_of_one_unit_of_movement

1. Starting deposit: example 10,000 units.
2. Required margin: exposure divided by leverage.
3. Close-out threshold: 50 per cent of required margin.
4. Buffer in account currency: starting deposit minus close-out threshold.
5. Distance to stop-out: buffer divided by the value of one unit of movement.

Example: you open a position with exposure of 30,000 units at 30:1 leverage. Required margin is 1,000 units. Close-out threshold is 500 units. Buffer is 10,000 minus 500 equals 9,500 units. If one point of movement is worth 10 units, price can move 950 points against you before the broker closes the position.

Compare that number with the distance to your technical stop. If the distance to stop-out is smaller than the distance to your stop, you are not controlling risk — the broker is, and it will do so at a level you did not choose. That sentence is the essence of leverage management.

Effective leverage is exposure divided by capital — and that is your true leverage, regardless of what the broker banner says. If you open a position with exposure equal to capital at 30:1 leverage, your effective leverage is 1:1.

Margin call and stop-out

When losses eat into the deposit, the broker may:

1. call for more funds (margin call),
2. automatically close positions.

That is not a broker conspiracy. It is the mechanics of protecting against negative balance and credit risk — described in the terms you signed. It is worth reading two specific sentences in those terms: at what margin level the broker calls for funds and at what level it closes positions.

Starting principle: size from risk, not from leverage

At the start, think in position size, not headline leverage. The 1–2 per cent risk rule is more important than the maximum leverage on the banner.

1. Set the technical stop where the setup is invalid.
2. Convert the loss at that stop into account currency.
3. Choose size so that loss equals 1R and is at most 1 per cent of capital.
4. Only then check whether margin even allows that position.

The free margin trap

Free margin is not a safety buffer — it is the distance to stop-out. Every additional position opened because there is free margin left reduces the buffer from step 4 above, bringing closer the price at which the broker will close all your positions at once. That is why an account with five small positions can be closed in one move, even though each position looked safe on its own.

For futures and crypto

Futures and perpetual futures have their own margin models, including initial and maintenance margin, funding rates, and liquidation. Before entering, read the specification: tick size, multiplier, session hours, and funding. The chart may look like a CFD — the risk mechanics are not. A CFD on an index is not the same as a futures contract on that index. The contract itself — what exactly commits you and who settles the trade — is explained in the lesson What is futures.

Crypto is subject to the lowest leverage limit for retail clients, 2:1. That does not mean crypto exchanges outside the EU follow the same threshold; outside EU regulation they may offer leverage of 50:1, 100:1, or more. That is one concrete risk difference between a regulated EU account and an offshore account.

Example: two traders, same market move

The difference does not come from better market feel — it comes exclusively from whether position size was chosen from stop and risk limit (trader A) or from what leverage allowed (trader B).

Common beginner mistakes

• I have free margin, so I will add another position.
• No daily limit when using high leverage.
• Tight stop plus large lot because leverage allows it.
• Switching to professional status for higher leverage without understanding what protection is lost.
• Not knowing the close-out threshold on your own account — learning about it from trade history instead of the terms.

Bridge to next tracks

You have the fundamentals. Next: technical analysis, the common language of charts, or risk if you want to practice demo trading now. Before you trade live, risk first.

Measurable exercise

Take hypothetical capital of 10,000 units. Set a stop 20 price units away on an instrument you know. Calculate size so that loss equals 100 units. Then calculate the distance to stop-out using the formula from this lesson and compare both numbers. Write the conclusion in your journal: does your stop fall before the close-out threshold or after it. If after — you are not managing that position.

When margin says do not trade

These conditions concern the deposit, not the chart direction: if any applies, the position does not enter the market, no matter how good the setup looks.

1. Distance to stop-out is smaller than distance to your stop. Then risk is controlled by the broker, and it will close the position at a level you did not choose. Calculate both numbers before entry, using the formula in this lesson.
2. You do not know the close-out threshold on your account. The position close level is in the terms, not in trade history. An unknown threshold means you do not know where your control ends.
3. You treat free margin as a budget for another position. Every entry because there is free deposit left reduces the account buffer and brings closer the forced close of all positions. Size comes from stop and the 1–2 per cent risk rule.
4. Effective leverage exceeds the limit in your plan. Exposure divided by capital is the number that grows with every additional position. If you do not know what it is, your plan does not contain a leverage limit.
5. Professional status appears as a way around the leverage limit. That choice removes negative balance protection and the hard position close threshold. If you cannot list exactly what you are giving up, do not apply.
6. The plan assumes holding overnight, but overnight funding is higher. The intraday level then no longer applies, and higher margin eats into the stop-out buffer. Check both levels in the broker’s table before entry.

A measurable exercise

Choose one demo instrument. Write down the capital, the 1 per cent risk in account currency, the distance to invalidation, the resulting size, and whether you end the session after the -2R limit. One row in a spreadsheet beats three hunches from a chat.

Common questions

Does higher leverage mean higher profit?

It increases exposure, so it increases both profit and loss. Without a 1R limit a stop-out comes easily. For learning, what counts is size from risk, not the maximum leverage in the offer.

What maximum leverage can I get on CFDs in the EU?

For a retail client the limits depend on the instrument class: 30:1 on major forex pairs, 20:1 on other pairs, gold and major indices, 10:1 on other commodities and indices, 5:1 on stocks, 2:1 on crypto. They do not apply to professional clients — but professional status means giving up part of that protection.

Does negative balance protection mean the broker will not close my position?

No. Those are two different things. Negative balance protection says you will not be left with debt. Margin close-out says the broker will close the position at 50 percent of required margin — usually earlier than you would like. That is why you calculate the distance to stop-out before entry.

How does CFD margin differ from futures margin?

The model and the rules (initial and maintenance margin, clearing) are often different. Do not carry the intuition over one to one — read the specification of the product you trade.