Forex leverage lets you control a currency position worth more than the money committed as margin. That makes relatively small exchange rate movements matter much more to your account. A margin call warns that your available funds are becoming inadequate; a stop-out closes positions when the account reaches the broker’s liquidation threshold.
The distinction matters because margin is neither a trading fee nor a maximum loss. An account can still show a positive cash balance while its open positions are close to forced closure. This guide focuses on the mechanics of leveraged forex trading, with UK retail rules identified separately from broker settings and illustrative calculations.
Leverage and margin measure different things
Leverage expresses the relationship between market exposure and the funds supporting it. At 20:1, a position worth £20,000 requires £1,000 of margin. The equivalent margin rate is 5%.
Margin is money set aside to support the position, not money spent buying the full underlying exposure. Gains and losses depend on the full position size. This is why the CFTC’s forex risk advisory warns that trading on margin amplifies both profits and losses.
There are two ratios worth separating:
Permitted leverage determines the margin needed to open a trade. Effective account leverage compares your actual exposure with your account equity. Both calculations must use amounts expressed in the same currency.
Suppose you have £2,000 of equity and hold £20,000 of currency exposure. Your effective leverage is 10:1, even if the broker permits 20:1. A 1% adverse movement represents roughly £200, or 10% of your equity, before costs and currency conversion effects.
Changing the permitted leverage does not change the profit or loss on an otherwise identical position. It changes how much margin the broker requires. The danger comes when lower margin requirements encourage you to open a larger position. Available capacity is not a trading target.
How to calculate forex margin
The basic calculation is:
Required margin = position value ÷ leverage ratio
Alternatively, multiply the position value by the margin percentage. Convert the exposure into the account currency where necessary, using the broker’s calculation method.
Consider a hypothetical US dollar account buying 20,000 euros through EUR/USD at 1.1000. The position’s dollar value is $22,000. Assuming the broker requires 5% margin, equivalent to 20:1, the opening requirement is:
$22,000 × 5% = $1,100
A fall from 1.1000 to 1.0950 produces a $100 trading loss: 20,000 × $0.0050. You do not multiply that result by 20 again. The position size already determines the exposure.
This calculation excludes spreads, commissions and financing. The relationship between currency units, price movements and cash results is covered further in forex pips, lot sizes and profit calculations.
Check the order ticket rather than assuming every pair uses the account’s headline ratio. Different instruments and position sizes may have different requirements.
Read equity, free margin and margin level together
Your cash balance alone cannot tell you how close an account is to liquidation. These figures answer different questions:
- Balance
- Account funds after booked transactions, excluding unrealised results on open positions.
- Equity
- Balance adjusted for open profits or losses and applicable charges or other account adjustments.
- Used margin
- Funds required to support existing exposure and, where applicable, pending orders.
- Free margin
- Equity minus used margin.
- Margin level
- Equity divided by used margin, multiplied by 100.
These relationships appear in MetaTrader 5’s account monitoring documentation, although account settings affect some adjustments.
Using the earlier trade, $2,000 of equity and $1,100 of used margin leave $900 of free margin. The margin level is approximately 181.8%.
A margin level of 100% means equity equals used margin. It does not mean the account has lost all its money. A level of 50% means equity equals half the margin requirement, not half the original deposit. That difference becomes especially important when several trades share one account.
Margin calls versus stop-outs
A margin call is a warning or demand to restore adequate account funding. Depending on the account terms, it may appear as a platform alert, message or request for additional funds. Do not assume someone will telephone you.
A stop-out is forced liquidation. The broker closes some or all exposure under its margin policy rather than waiting for you to decide whether the trade might recover.
The warning threshold and liquidation threshold are separate settings. A broker might warn at a 100% margin level and begin closing positions at 50%, but that combination is an example, not a universal rule. Check the actual percentages and how they are calculated.
Nor should you treat a warning as a guaranteed grace period. Plan on the basis that fast price changes could leave no useful time between an alert and closure.
UK retail leverage limits and the 50% rule
For UK retail forex CFDs and covered rolling spot forex contracts, maximum leverage is generally 30:1 on major currency pairs and 20:1 on other pairs. The corresponding minimum margin requirements are 3.33% and 5%.
The account-level close-out rule requires action when equity falls below 50% of the required margin, with closure taking place as soon as market conditions allow. Brokers can use a higher close-out percentage, provided their terms make this clear. They may also impose stricter margin requirements. These provisions are set out in the FCA policy statement on retail CFD restrictions.
The regulatory threshold is a backstop, not a recommended loss allowance. It does not promise execution at an exact price or preserve half your starting capital.
A worked margin call and stop-out example
Return to the hypothetical account with a $2,000 balance and $1,100 of required margin. Assume the margin requirement stays fixed, there are no costs or other trades, and the broker warns at 100% and begins liquidation at 50%.
| Open trading result | Equity | Free margin | Margin level | Account position |
|---|---|---|---|---|
| $0 | $2,000 | $900 | 181.8% | Above the assumed warning threshold |
| −$900 | $1,100 | $0 | 100% | Assumed margin call threshold |
| −$1,200 | $800 | −$300 | 72.7% | Below the warning threshold |
| −$1,450 | $550 | −$550 | 50% | Assumed stop-out threshold |
At the final row, the account has lost 72.5% of its starting equity, despite reaching a “50%” stop-out level. The percentage refers to required margin, not the original $2,000.
Negative free margin is also different from negative equity. Here, free margin turns negative while the account still has funds. Whether positions remain open depends on the broker’s closure rules.
If liquidation closes the only trade exactly at a $1,450 loss, the remaining balance is $550 and its margin requirement disappears. The loss does not disappear with it. Actual execution prices and charges can change the final amount.
With several positions, closing one trade may release enough margin to keep others open. Do not assume the broker will close the trade you would have chosen first.
Why the margin buffer can shrink unexpectedly
Price losses are not the only pressure on an account. Charges, changing margin requirements and new exposure can also reduce the gap between current equity and forced liquidation.
Spreads and financing. A wider bid-ask spread can worsen the value at which an open position could be closed. Financing debits and commissions also reduce available funds. Include these in your calculations using the account’s actual forex spreads, commissions and overnight charges, rather than treating trading costs as an afterthought.
Margin requirement changes. Check the broker’s terms and notices for changes affecting existing positions. With equity unchanged at $2,000, increasing required margin from $1,100 to $1,600 would reduce the displayed margin level from 181.8% to 125%.
Additional positions. Opening another trade can increase used margin immediately. Different currency pairs can also share the same underlying risk: buying EUR/USD and GBP/USD creates two positions that can both suffer from dollar strength.
Pending orders deserve attention too. An order that activates while another trade is losing can increase exposure precisely when the account has less room to support it.
A stop-out is not a stop-loss order
A stop-loss order is your instruction to exit when a trade reaches a chosen price. A stop-out follows the broker’s margin rules. It can happen before your intended stop price if losses elsewhere in the account have weakened its equity.
An ordinary stop-loss also does not guarantee its execution price. During a sharp move or a market gap, the available closing price can be worse than the trigger. The ESMA and EBA investor warning on CFDs identifies rapid price changes and market closures as circumstances in which stop-loss limits may fail to provide the intended protection.
Keep the two calculations separate: the planned loss if your stop executes as expected, and the account’s capacity to withstand worse execution. Relying on the broker’s liquidation process instead of choosing an exit gives up control over both timing and which positions remain open.
Can you lose more than your margin?
Yes. A trade’s opening margin is not its maximum loss. In the worked example, the loss reaches $1,450 even though the trade required only $1,100 of margin.
For UK retail accounts covered by the CFD rules, negative balance protection caps liability for those products at the funds dedicated to trading them in that account. This is separate from the margin close-out rule and does not prevent the loss of all those funds. The legal provisions appear in FCA COBS 22.5 on margin and negative balance protection.
Unused cash within the relevant trading account is therefore not automatically sheltered from losses. “Only £1,100 is being used as margin” does not mean the rest is protected.
Do not assume the same safeguards apply after changing legal entity, jurisdiction or client category. Review the consequences of retail versus professional client status before accepting higher trading limits.
Manage exposure before a margin warning arrives
Start with the loss you can afford and the trade’s intended exit, then calculate the position size. Only after that should you check whether the account can support its margin requirement. Reversing that order turns the broker’s maximum allowance into your risk budget.
Before placing an order, check three things:
- The cash loss at your planned exit, including an allowance for costs and worse execution.
- The equity and margin level that would remain if several open positions moved against you together.
- The broker’s warning threshold, liquidation method and rules for changing margin requirements.
If a warning arrives, distinguish reducing exposure from adding funds. Closing or reducing positions cuts market exposure and may release margin. Adding money increases the account buffer but does not reduce the loss per pip on positions that remain open. A deposit is not a repair to the trade itself.
Avoid borrowing money or using essential savings to postpone liquidation. Review the account’s position sizing and forex risk controls before opening further exposure.
The practical aim is not to remain a fraction above the stop-out line. It is to choose position sizes that leave room for ordinary losses, trading costs and imperfect execution without making forced liquidation part of the trading plan.