Understanding Leverage
Leverage is a tool, not a strategy. This guide explains margin, margin calls, and how to choose leverage that matches your risk plan.
Table of contents
1) Leverage vs margin
Leverage lets you control a larger position with a smaller deposit (margin). Margin is the amount your broker sets aside while your trade is open.
2) Margin call and stop-out
If your losses reduce your available equity too much, you can get a margin call. If equity keeps falling, the broker may close positions automatically (stop-out).
- Using a stop-loss avoids forced liquidation in most cases.
- High leverage + no stop-loss is a common account killer.
3) Using leverage responsibly
- Choose position size from risk, not from maximum leverage allowed.
- Keep margin usage comfortable so normal volatility doesn’t trigger a margin call.
- Lower leverage is often better for beginners.
4) Simple examples
If you risk $50 per trade, your position size should be set so that your stop-loss equals $50—even if your broker offers 1:500.