Lesson 6 Leverage Margin and Account Equity

Calculate notional value and indicative margin, interpret account fields, and explain why a margin deposit is not a loss limit.

Leverage describes exposure relative to capital

The notional value is the position’s underlying exposure. For 10,000 EUR in EUR/USD at 1.1000, notional value is 11,000 USD. If the illustrative margin requirement is 5%, required margin is 550 USD. This corresponds to 20:1 leverage on the margin amount. If the account equity is 2,000 USD, effective account leverage for this position is 11,000 ÷ 2,000 = 5.5 times, even if the platform permits a higher maximum. A leverage setting permits exposure; the units actually opened determine exposure. For a fixed position size, changing a leverage setting does not change its pip value. It may change required margin and the point at which a provider can close positions. Leverage availability is not a reason to increase size.

Read the account fields

Field: Balance; Working meaning: Cash ledger value after posted activity
Field: Unrealised profit or loss; Working meaning: Current marked result of open positions
Field: Equity; Working meaning: Balance plus unrealised result, with applicable adjustments
Field: Used margin; Working meaning: Collateral requirement supporting open positions
Field: Free margin; Working meaning: Equity minus used margin under the platform’s method
Field: Margin level; Working meaning: Equity divided by used margin, multiplied by 100, when that measure is used

Worked example: Start with a 2,000 USD balance and one position requiring 550 USD margin. A floating loss of 100 USD leaves equity of 1,900 USD, free margin of 1,350 USD, and margin level of about 345.45%, assuming used margin stays at 550 USD and no other adjustments occur. The balance remains 2,000 USD until the loss is realised, ignoring charges posted separately. The account has still lost economic value. An open loss is real exposure even before a trade is closed.

A larger position makes the same percentage move more costly

For an illustrative linear exposure in a 2,000 USD account:

USD notional: 2,000; Effective account leverage: 1 times; Loss from a 1% adverse move before costs: 20 USD; Percentage of starting equity: 1%
USD notional: 10,000; Effective account leverage: 5 times; Loss from a 1% adverse move before costs: 100 USD; Percentage of starting equity: 5%
USD notional: 40,000; Effective account leverage: 20 times; Loss from a 1% adverse move before costs: 400 USD; Percentage of starting equity: 20%

The highest row is an illustration of exposure, not a suggested order. Actual margin rules, conversion, price paths, and liquidation can affect account results.

Margin close out is a provider action

A provider may reject new orders or liquidate positions when equity is insufficient. Thresholds, calculation methods, and warnings vary. Do not rely on receiving a phone call or an opportunity to deposit more money. The margin requirement can change, and liquidation may occur at an unfavourable price. Negative balance protections also vary by jurisdiction and client classification. UK retail CFD protections are an example of specific rules, not universal forex terms. FCA CFD framework (https://www.fca.org.uk/firms/contract-for-differences).

Practice

Using a hypothetical 1,000 USD account, calculate the indicative margin for 10,000 EUR at EUR/USD 1.1000 with a 5% requirement. Then calculate equity, free margin, and margin level after a 50 USD floating loss. Explain why the required margin does not limit the loss to that amount.

Check your understanding

After the four lessons in this module, complete Module 2 knowledge check from the course overview. It contains the three questions from each lesson with feedback after submission. Keep written calculations in your workbook.

Glossary

CFD: Contract for difference, creating contractual exposure to price changes
Equity: Account value including open profit or loss and applicable adjustments
Free margin: Equity less used margin under the platform’s method
Leverage: Exposure relative to the capital supporting it
Margin: Collateral required to support a position
Notional: The underlying value of a position’s exposure
Pip: A conventional exchange rate movement unit
Unrealised result: Marked profit or loss on a position still open