Routes through the courseSeven lessons on what leverage actually borrows, what margin is held against it, and what a stop out looks like.
Understand leverage without emptying an account
Lessons on this route
7 lessons
- 1 · Lesson 1.7
Leverage and margin: how much of the trade is yours
Leverage sets how large a position your deposit can hold. Margin is the part of your money locked against it while the trade is open.
- 2 · Lesson 1.4
Lots: standard, mini and micro
A lot is how much of the instrument one trade controls. Standard is 100,000 units, mini is a tenth of that, micro a hundredth.
- 3 · Lesson 1.9
Stop loss and take profit
Two instructions you attach to a position: one closes it at a loss you chose in advance, the other at a profit you chose in advance.
- 4 · Lesson 3.1
Risk per trade: the 1-2% rule
Deciding the money you can lose on one trade before deciding anything else. Everything downstream — size, stop, target — follows from that number.
- 5 · Lesson 3.2
Working out position size
Risk in money, divided by the stop distance in pips, divided by pip value. Three numbers you already have, in that order.
- 6 · Lesson 3.4
Drawdown and losing streaks
How far an account falls from its peak, and why a run of losses is normal rather than evidence that something broke.
- 7 · Lesson 3.5
Margin call and stop out
The two thresholds at which a broker warns you and then closes your positions, and the numbers that bring an account to them.
Leverage, margin and the borrowed amount
The word leverage comes from the idea of a lever: a small force moving a heavy load. On a trading platform it is shown as a ratio, such as 20:1 or 30:1. That ratio tells you how many times your own money is multiplied when a position is opened. It is not a bonus and it is not free money. It is a loan from the broker, and the loan has to be repaid when the position closes.
Margin is the part of your account balance that the broker sets aside as security for that loan. If leverage is 30:1, the margin required is one thirtieth of the position's full value. The rest is borrowed. On a platform, the margin is usually shown as a dollar figure next to the open trade. That figure is not a fee. It is your own money, locked while the trade is open, and returned when the trade closes.
The borrowed amount moves with the market. If the trade goes against you, the loss comes out of your account balance first, not the broker's. Leverage does not increase the size of your account. It increases the size of the position, and therefore the size of each price movement in dollars. A small move in the market becomes a large move in your account. That is the whole mechanism, and it is why the order of these lessons matters.
Position size, risk and the order of work
Before any trade is placed, three numbers need to be decided: the stop loss distance, the percentage of the account to risk, and the position size. The stop loss is the price at which you accept the trade is wrong and close it. The risk percentage is a limit you set for yourself, commonly between one and two per cent of the account balance. The position size is the number of lots that makes the loss at the stop equal to that percentage. If any of the three is missing, the other two cannot be calculated.
The order is fixed because each number feeds the next. First the stop, based on the chart, not on the money. Second the risk percentage, based on the account balance, not on confidence. Third the position size, which is arithmetic. Doing it in any other order means choosing a lot size first and then hoping the stop fits. That is how accounts are emptied. The lessons on lots and on working out position size exist to make this arithmetic familiar before any money is at risk.
Drawdown and losing streaks are not exceptions. They are part of the sequence. A run of losses reduces the account balance, which reduces the dollar amount that one or two per cent represents, which reduces the position size for the next trade. If that adjustment is not made, the risk per trade rises without anyone deciding it should. The lesson on drawdown is placed before the lesson on margin call because the first causes the second. A margin call is not a market event. It is an account event, and it follows from the numbers above.
What the route is for and what it does not do
This route is for someone who has opened a demo account, seen the leverage setting, and does not know what it changes. It is also for someone who has traded a few times and noticed that the loss on a closed trade was larger than expected. It is not for someone looking for a strategy, a signal, or a reason to trade. The route teaches the mechanics of borrowed money and the arithmetic that keeps the borrowing within limits. It does not teach when to buy or sell.
The route uses AUD/USD around 0.6640 in its examples because the numbers are easy to follow and the instrument is familiar. The currency is the Australian dollar, written A$ in account statements. The regulator for retail trading in Australia is ASIC, and ASIC sets rules about leverage that brokers must follow. Those rules vary by broker and by instrument, so the exact ratio shown on a platform is not fixed. What does not vary is the arithmetic: margin, position size and stop loss work the same way at any ratio.
Finishing the route does not make anyone profitable. It makes the account balance legible. After the seven lessons, a reader should be able to look at an open trade and say how much of it is their own money, how much was borrowed, what the loss will be if the stop is hit, and what percentage of the account that loss represents. That is the whole outcome. It is a small outcome, and it is the one that has to be in place before any other question about trading can be answered honestly.
Doing it once, step by step
The steps below are the order of work for this route. Each one is done once, in sequence, before the next is started.
- 01
Open a demo account and find the leverage setting
Use a demo account from a broker that accepts Australian residents and offers PayID, BPAY or card deposits for later. Find the leverage setting in the account preferences. Note the ratio shown, such as 20:1 or 30:1. Do not change it yet. The point is to see where it lives on the platform.
- 02
Place one trade and read the margin line
Open a small AUD/USD position at the demo price near 0.6640. Before closing it, find the margin figure shown next to the trade. Write down the position size, the margin held, and the account balance. Close the trade. Compare the margin figure with the balance. That comparison is the first lesson made concrete.
- 03
Calculate the value of one pip for three lot sizes
Using the same AUD/USD price, work out what one pip is worth for a standard lot, a mini lot and a micro lot. Write the three figures side by side. Then work out what a 20 pip move would be in dollars for each. This is the arithmetic that makes position sizing possible later.
- 04
Set a stop loss and a take profit on a demo trade
Open another demo trade and place a stop loss and a take profit before entering. Choose the distances from the chart, not from the money. Let the trade run until one of them is hit. Record which one closed the trade and what the dollar result was. Repeat until the process of placing both orders is automatic.
- 05
Work out position size from a fixed risk percentage
Decide on a risk limit of one per cent of the demo balance. Choose a stop distance in pips. Use the pip value from the earlier step to calculate the lot size that makes the loss equal to one per cent. Place the trade at that size. Check the margin held against the balance. If the margin is more than a small fraction of the balance, the leverage is too high for the risk limit.
- 06
Simulate a losing streak and watch the margin level
Take five demo trades in a row with the same one per cent risk, and close each at the stop. After each loss, recalculate the one per cent from the new, lower balance. Watch the margin level figure on the platform. Note how many losses it takes before the platform warns of a margin call. That number is the distance between the current account and a stop out.
Questions that come up next
What has to be ready before the first lesson of this route?
A demo account with an Australian broker, opened with PayID, BPAY or a card, is enough to start. The platform needs to show AUD/USD at around 0.6640 so the examples match what is on screen. A calculator and a written record of the account balance are also needed, because every later lesson uses that balance as its starting number. No real money is required until the arithmetic in the middle lessons is comfortable.
Why does the route put lots before stop loss and take profit?
Lots decide how much one pip of movement is worth in dollars, so the size of a stop cannot be judged in money until lots are understood. A stop of twenty pips is a different loss on a standard lot than on a micro lot. Learning the stop first would mean learning a distance without knowing what it costs. The order is fixed by that dependency, not by difficulty.
Does the one to two per cent rule apply to every account size?
It is a common starting limit, not a rule set by ASIC or by any broker. A small account may find one per cent too small to place a trade at all, because the minimum position size on the platform sets a floor. The percentage is a personal limit, and it can be lowered. What matters is that the number is chosen before the trade, not after the loss.
What happens on the platform when margin runs low?
The platform warns first, usually by changing the colour of the margin figure or sending a margin call notice. If the balance keeps falling, the broker closes open positions automatically. That closure is the stop out. The exact level at which the warning and the closure happen varies between brokers, so the figure has to be read on the broker's own platform.
How long does the route take to work through?
The seven lessons are short, but the practice between them is not. Working out position size by hand for twenty or thirty imaginary trades takes longer than reading the lesson. Rushing that practice is the main reason people arrive at the stop out lesson without having understood the ones before it. A week of daily practice is a reasonable pace for a beginner.
Can leverage be turned off?
On most platforms the ratio can be reduced in the account settings, and some accounts are opened with a lower ratio by default. Reducing it does not change the market, only the amount borrowed and the margin held. It is one of the few settings a beginner can change that lowers risk without changing the strategy. The available ratios vary between brokers.
The words used on this page
- Leverage
- A ratio, such as 20:1, showing how many times your own money is multiplied when a position is opened. The multiplied part is borrowed from the broker and repaid when the trade closes.
- Margin
- The part of your account balance the broker sets aside as security for the borrowed amount. It is your own money, locked while the trade is open, not a fee.
- Lot
- The unit that measures position size. A standard lot, a mini lot and a micro lot are different fixed quantities, and each pip of movement is worth a different amount in dollars on each.
- Stop out
- The point at which the broker closes open positions automatically because the account no longer holds enough margin. It happens after a margin call, and the level varies between brokers.
- Drawdown
- The fall from a previous account high to a later low. It is measured in money or in per cent, and it is a normal part of a sequence of trades rather than a sign that something has gone wrong.
- Position size
- The number of lots in a trade, calculated so that the loss at the stop loss equals the chosen percentage of the account balance. It is the last of the three numbers to be decided.
What to take away
- Leverage borrows against your balance, so the loss on a bad trade comes out of your money first.
- Stop loss, risk percentage and position size are decided in that order, because each one feeds the next.
- Drawdown and losing streaks are part of the sequence, so the plan has to survive them before it is used.
- Finishing this route leaves a reader able to size a trade by hand and to recognise a margin call before it becomes a stop out.