Leverage and margin: how much of the trade is yours

Leverage is written as a ratio, such as 1:30 or 1:100. The first number is your own money. The second number is the size of the position that money can hold. At 1:100, each A$1 of your money stands behind A$100 of position. The ratio is set by the broker and shown in the account details. It varies between brokers.

On a trading platform the ratio is often displayed as a single number, for example 100, with the word leverage beside it. That number is the second half of the ratio. A setting of 100 means 1:100. A setting of 30 means 1:30. The platform does not show the first number because it is always 1. The ratio applies to the notional value of the position, not to your deposit.

The notional value is the full size of the trade. For AUD/USD it is counted in US dollars, because the US dollar is the quote currency. One standard lot is 100,000 units of the base currency, which is the Australian dollar here. At an example rate of 0.6640, those 100,000 Australian dollars are worth 66,400 US dollars. That 66,400 USD is the notional value the ratio acts on.

Margin is the part of your account balance that is set aside while a position is open. It is not a fee and it is not spent. It stays in your account but cannot be used to open other positions. When the position closes, the margin is released. The amount is calculated from the notional value divided by the leverage ratio.

The margin figure on the platform is usually shown in your account currency. If your account is in Australian dollars and the position is in US dollars, the platform converts the margin at its own rate. That rate is not the same as the rate shown on a news site. It varies between brokers and can change during the day. The figure on the platform is the one that counts for your account.

Margin is not the most you can lose. Losses are counted on the full notional value. A move against you of a few pips can be larger than the margin locked. If the loss uses up the margin and more, the broker may close the position to protect the rest of your balance. That action is often called a margin call or a stop out, and the level at which it happens is set by the broker.

A common habit is to pick the largest position the margin allows. That habit treats margin as a target. A safer order is to decide first how much of your balance you are willing to lose on the trade, then work out the position size that fits, then check the margin. The margin check comes last because it is a requirement, not a goal.

To size from risk you need the distance to your stop loss in pips and the value of one pip for the position you are considering. On AUD/USD, one pip on one standard lot is 10 USD. If you are willing to risk 50 USD and your stop is 20 pips away, the position size is 50 divided by 20, then divided by 10. That gives 0.25 standard lots, or 25,000 units. The margin for that size is then calculated on its own notional value.

The notional value of 0.25 standard lots at 0.6640 is 16,600 USD. At 1:100 the margin is 166 USD. At 1:30 it is 553.33 USD. Those figures are examples and the broker may round them or apply its own conversion rate. The point is that the risk decision came first and the margin figure followed. If the margin is larger than you can lock, you reduce the size rather than increase the leverage.