Margin and Leverage in CFD Trading: How They Work

This page is about margin in leveraged CFD trading. It is not about margin lending, the arrangement where a bank lends you money against shares you own to buy more shares. The two share a word and almost nothing else. If you arrived looking for a loan secured against a share portfolio, this is the wrong page.

What follows is arithmetic. The CFD explainer already covers what margin is and where it sits among the costs of a position, so this page skips the concept and goes to the calculation. By the end you should be able to work out the margin your own position requires and how far the market can move against you before anyone intervenes.

Leverage magnifies losses as readily as gains. A position can lose more than the margin committed to it and can consume your entire account balance. The arithmetic below exists to show you exactly how that happens.

Required margin, in one formula

CFD margin is the portion of your own balance the broker holds while a position is open. The amount is determined entirely by how big the position is and what leverage applies to the instrument, and the calculation is identical on every instrument. Only the leverage changes.

Required margin = position value ÷ leverage

Position value, also called notional value, is the full size of the exposure rather than what you put up. For a currency pair it is the number of units multiplied by the price. For an index or a commodity it is the number of contracts multiplied by the price multiplied by the value per point.

The same calculation is often written the other way round, using a margin rate instead of a leverage ratio. The margin rate is simply the reciprocal, expressed as a percentage.

Both expressions describe the same thing. A broker quoting 20:1 and a broker quoting a 5% margin rate are asking for the same deposit.

Leverage is capped by asset class for retail clients in regulated jurisdictions, and the caps are tiered by how volatile the instrument is. Currency majors sit at the permissive end, individual shares and crypto-assets at the restrictive end. The specific leverage and margin rate that apply to any instrument on your own account are set out on the account specifications page, and those are the figures to work from rather than any example here.

Balance, equity, used margin, free margin

Four numbers describe a margin account, and the one most people watch is the one that tells them least while a position is open.

Balance is the cash from closed positions. It does not move while trades are open. A balance of $5,000 reads $5,000 whether your open position is deep in profit or close to being liquidated.

Equity is the balance adjusted for unrealised profit and loss. It moves with every tick. Equity is what you would actually have if every position closed at the current price, and it is the number that determines whether you are in trouble.

Equity = balance + unrealised profit − unrealised loss

Used margin is the total required margin across all open positions. It is set when each position opens and does not change as price moves.

Free margin is what equity remains after used margin is accounted for. It is the capacity available to open further positions and, more importantly, the buffer that absorbs losses on existing ones.

Free margin = equity − used margin

Margin level ties them together and is the number brokers actually monitor.

Margin level = (equity ÷ used margin) × 100%

A margin level of 500% means equity is five times the margin held. At 100%, equity exactly equals used margin and free margin has reached zero. Below that, equity is being consumed from the margin itself.

The distinction between balance and equity is where beginners get caught. A trader watching a static balance of $5,000 can be moments away from having positions closed, because the broker is watching equity and the two have separated.

What triggers a margin call, and then a stop-out

Two thresholds matter, and they do different things.

A margin call is a warning. When margin level falls to the broker's call threshold, you are notified that the account no longer holds comfortable cover for its open positions. Nothing is closed. You can deposit funds, close part of the exposure, or do nothing and accept the risk. The margin call definition people usually want is exactly this: a notification that free margin has run out or nearly so, not an automatic action.

A stop-out, also called margin close-out, is not a warning. When margin level falls to the close-out threshold, the platform begins closing positions automatically to prevent further loss. You are not consulted, and in a fast market you may be closed out before you have read the margin call.

The thresholds are set by your broker and stated in the account terms. In Australia, firms holding an AFS licence operate under a regulatory floor: ASIC's product intervention order requires a retail client's positions to be closed when account equity falls below 50% of total initial margin, alongside mandatory negative balance protection and the tiered leverage caps above.

That floor applies to AFS-licensed issuers and retail clients. If your account sits with an entity licensed elsewhere, the close-out level is whatever that entity's terms specify, which may be higher or lower. Check your own account page rather than assuming, because this is the number that decides when the decision is taken out of your hands.

One further mechanic matters. Close-out operates at the account level, not the position level. A trader holding several positions can have all of them closed because of an adverse move in one, since it is total equity against total used margin that crosses the threshold.

Worked example: a position that survives

Account balance $5,000. The trader buys 0.5 lots of EUR/USD at 1.0800, with 30:1 leverage applying.

Setting up the position. Half a lot is 50,000 units. Position value is 50,000 × 1.0800 = $54,000. Required margin is $54,000 ÷ 30 = $1,800.

At the moment of opening, with no profit or loss yet, equity equals the balance at $5,000. Used margin is $1,800, so free margin is $3,200 and the margin level is $5,000 ÷ $1,800 × 100 = 278%.

One pip on 50,000 units of a dollar-quoted pair is worth $5.

The market moves against the position. EUR/USD falls 100 pips to 1.0700. The loss is 100 × $5 = $500.

Equity falls to $4,500. Used margin stays at $1,800, because required margin is fixed when the position opens. Free margin is now $2,700 and the margin level is 250%. The position is losing, and it is nowhere near any threshold.

How far it can fall. For margin level to reach 100%, equity must drop to $1,800, a loss of $3,200, which at $5 per pip is 640 pips. For close-out at 50%, equity must drop to $900, a loss of $4,100, which is 820 pips.

EUR/USD can travel 820 pips, but it takes a sustained move over weeks rather than a bad afternoon. The position has room.

Worked example: a position that does not

Same account, same instrument, same entry price, same leverage. The only change is size: the trader buys 1.2 lots instead of 0.5.

Setting up the position. That is 120,000 units. Position value is 120,000 × 1.0800 = $129,600. Required margin is $129,600 ÷ 30 = $4,320.

Equity is still $5,000, but used margin is now $4,320. Free margin is $680 and the margin level at the moment of opening is $5,000 ÷ $4,320 × 100 = 116%.

That number should stop you. The position has barely opened and the account is already within sixteen percentage points of the level where free margin is exhausted. One pip is now worth $12.

The same 100-pip move. The loss is 100 × $12 = $1,200. Equity falls to $3,800, below used margin of $4,320. Free margin is negative, the margin level is 88%, and the margin call has already fired.

How far it can fall. Margin level reaches 100% after a loss of $680, which at $12 per pip is 57 pips. Close-out at 50% comes when equity reaches $2,160, a loss of $2,840, or 237 pips.

Fifty-seven pips is a routine morning in EUR/USD. Two hundred and thirty-seven pips is a normal fortnight, or a single session when something unexpected happens.

The two positions side by side

Same account, same instrument, same market view, same permitted leverage. One survives an ordinary adverse move with room to spare. The other is in trouble within an hour.

Nothing about the market distinguishes them. The only variable is position size, and it changed the outcome by a factor of more than ten.

Maximum leverage and effective leverage

The last row of that table is the one worth carrying away.

Maximum leverage is a ceiling the broker and the regulator impose. Effective leverage is what you actually chose, and it is the figure that governs your risk.

Effective leverage = total position value ÷ equity

Position A runs at 10.8:1 against the account. Position B runs at 25.9:1. Both sit under the 30:1 cap, and the cap did nothing to distinguish between a position with 820 pips of room and one with 237.

A leverage limit is an upper bound on what you are permitted to do, not guidance on what you should do. Trading well inside it is how the same instrument becomes a manageable position rather than an account-threatening one. Nothing stops you from using 5:1 on an instrument where 30:1 is available.

Working out your own numbers

The sequence takes a minute and should happen before the position opens rather than after.

1. Find the leverage or margin rate for your instrument on your broker's account specifications page. It differs by asset class and sometimes by position size.

2. Calculate position value. Units multiplied by price for a currency pair; contracts multiplied by price multiplied by value per point for an index or commodity.

3. Divide by leverage to get required margin, or multiply by the margin rate.

4. Subtract it from equity to get free margin, which is your buffer.

5. Work out what one point or pip is worth at your position size.

6. Divide the buffer by that value to get the distance, in points, to a margin call. Repeat using the close-out threshold for the distance to liquidation.

7. Compare that distance to how far the instrument normally moves. If the answer is a fraction of a typical day, the position is too large regardless of how confident you are about direction.

Step seven is the one that gets skipped, and it is the one that matters. A distance of 57 pips means nothing in the abstract. Measured against EUR/USD it is small, and the same reasoning applied to gold would be absurd, since a standard gold contract moves $100 for every dollar of price change.

Four things that catch people out

• Margin requirements can change. Brokers raise margin rates ahead of known volatility events, elections and major announcements among them, and over weekends. A position comfortable on Friday can be in margin call on Monday without the market having moved, because the margin held against it went up.

• Positions in other currencies move your margin. If your account is in one currency and the position is denominated in another, both the required margin and the profit and loss are converted. Exchange rate movement alters the numbers independently of the trade.

• Overnight financing erodes equity quietly. It is charged nightly on the full position value and reduces equity, which lowers margin level, which moves you closer to a call even in a flat market. On a long-held leveraged position this accumulates.

• Close-out ignores your reasoning entirely. It does not know about the level you were watching or the event you were waiting for. It executes on an arithmetic threshold, which is why a stop placed at a level you chose is a different kind of protection from a close-out imposed at a level you did not.

Frequently asked questions

What is margin in trading?

Margin is the portion of your own balance the broker holds while a leveraged position is open. It is a deposit rather than a cost, it returns to your balance when the position closes, and its size is determined by position value divided by the leverage applying to that instrument.

What is a margin call?

A margin call is a notification that your account equity has fallen to a level where it no longer comfortably covers the margin required by your open positions. It is a warning rather than an action. Positions stay open and you can add funds, reduce exposure, or accept the risk.

What is the difference between a margin call and a stop-out?

A margin call warns you. A stop-out closes positions automatically once margin level reaches the close-out threshold, without consulting you. In a fast market both can happen within minutes of each other.

How do I calculate required margin?

Divide the position value by the leverage, or multiply the position value by the margin rate. Position value is the full exposure, not the amount you deposit. For 100,000 units of a pair trading at 1.0800, that is $108,000 of exposure, requiring $3,600 at 30:1.

What is the difference between balance and equity?

Balance is cash from closed positions and does not move while trades are open. Equity is the balance adjusted for unrealised profit and loss, and it changes with every tick. Brokers monitor equity, so it is the number that determines whether your positions are at risk.

What is free margin?

Equity minus used margin. It is the capacity available to open new positions and the buffer absorbing losses on existing ones. When free margin reaches zero, the margin level is 100% and a margin call is imminent or already issued.

What is a margin rate?

The percentage of position value held as margin, which is the inverse of the leverage ratio. A 5% margin rate is the same requirement as 20:1 leverage, expressed differently.

Can I lose more than the margin I committed?

Losses are calculated on the full position value rather than the margin posted, so a loss can exceed the margin held against that position and can consume the whole account balance. Negative balance protection, where it applies, prevents the account going below zero. It does not prevent it being emptied.

Does margin work the same way in forex as on other instruments?

The formula is identical. What differs is the leverage permitted on each asset class and how far each instrument typically moves, which together determine how much room a given position has. A margin requirement that is generous on a currency pair can be inadequate on an individual share.

How do I avoid a margin call?

Size positions so the distance to the threshold is large relative to how far the instrument normally moves, keep effective leverage well below the permitted maximum, and allow for financing and for margin requirements rising around known events. A margin call is a sizing outcome rather than a market event.

You can check the leverage, margin rate and close-out level that apply to each instrument on your own account at www.axonmarkets.com, and test the arithmetic on a demo account before funding anything.

Risk warning: CFDs are leveraged products and carry a high level of risk. Losses are calculated on the full position value, can exceed the margin committed to a position, and can consume your entire account balance. Leveraged positions can be closed automatically when account equity falls below the close-out threshold, without notice and regardless of your view on the market. CFDs are not suitable for all investors. Make sure you understand how these products work and whether you can afford the risk of losing your money. All figures in this article are illustrative and do not reflect the leverage, margin rates or thresholds on any particular account. This article is educational information only. It is not investment advice, a recommendation, or an offer to trade, and it does not take account of your objectives, financial situation or needs. Regulatory details were accurate at the time of writing and should be verified at source.

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