Margin trading
Opening a large position with a smaller deposit, called margin. It is how CFD trading works, and it magnifies losses as well as gains.
What margin trading is.
You set aside a deposit, and the position is worth many times more.
When you trade a CFD, you do not pay the full value of the position. You set aside a deposit, called margin. Your profit or loss is based on the full value.
Leverage is the ratio between the position and the margin. At 1:100, $1,000 of margin supports a $100,000 position. The maximum leverage depends on the broker, the account and the instrument.
Leverage magnifies losses as well as gains. A small move against a large position can cost far more than the margin you set aside.
How margin is calculated.
Margin is the position’s full value divided by the leverage.
Work out the position value.
One standard lot of EUR/USD is 100,000 euros. At a price of 1.1000, that is worth $110,000.
Divide by the leverage.
At 1:500, the margin is $110,000 ÷ 500 = $220. At 1:100, it would be $1,100.
Check what is left.
Equity is your balance plus or minus the profit or loss on open trades. Free margin is equity minus the margin in use. It is what remains to open new trades or absorb losses.
Margin = position value ÷ leverage
Free margin = equity − used margin
Margin level = equity ÷ used margin × 100%
A worked example.
Suppose you have $1,000 in a US dollar account and buy one lot of EUR/USD at 1.1000, at 1:500.
The trade uses $220 of margin, and each pip is worth $10. A 1% move in EUR/USD is 110 pips, or $1,100, which is more than your whole balance.
For this example only, suppose a broker sets its margin call at a 100% margin level and its stop-out at 50%. Costs are left out, and the margin is held at $220, to keep the numbers clear.
| Price | Equity | Margin level | |
|---|---|---|---|
| Trade opened | 1.1000 | $1,000 | 1,000 ÷ 220 = 455% |
| Down 50 pips | 1.0950 | $500 | 500 ÷ 220 = 227% |
| Down 78 pips: margin call | 1.0922 | $220 | 220 ÷ 220 = 100% |
| Down 89 pips: stop-out | 1.0911 | $110 | 110 ÷ 220 = 50% |
At the stop-out, the position is closed and $890 is lost. That came from a move of less than 1% in EUR/USD.
In a fast market the close can happen at a worse price, so the loss can be larger. Margin call and stop-out levels vary by broker, so check them before you trade.
The leverage on offer is a maximum, not a target. With 0.1 lots instead of one, the same 89-pip move would cost $89.
Margin calls and stop-outs.
What happens as losses eat into your margin.
Margin level.
Your equity as a percentage of the margin in use. It falls as losses grow, and MT5 shows it in the Trade tab.
Margin call.
A warning that your margin level has reached a set point. You can add funds, or reduce or close positions.
Stop-out.
If the margin level keeps falling to the stop-out point, positions are closed automatically, usually starting with the largest loss.
Free margin.
Equity minus the margin in use. When it runs out, you cannot open new positions.
Overnight costs and ownership.
Two things to know before you hold a CFD for more than a day.
A position held past the daily rollover pays or receives swap. It reflects interest rates and the broker’s charges, and is often a cost.
Swap is applied for every night, weekends included. Many brokers charge three nights at once on one weekday to cover the weekend.
Holding a CFD does not make you the owner of the underlying asset. You have no voting rights on a share CFD, and you cannot take delivery of gold or oil.
A CFD is a contract with your broker. When you trade CFDs with Clarity, Clarity is the counterparty to your trades.
Common mistakes.
Where traders new to margin most often go wrong.
Treating the maximum leverage as a target. You choose the position size, and smaller positions leave more room.
Watching margin, not risk. A trade can use little margin and still lose a large share of the account.
Ignoring the margin level until a call comes. By then, the choices are fewer and worse.
Forgetting swap on positions held for weeks. It is charged every night, weekends included.
Opening several positions in related markets. Losses on trades that move together can arrive together and use up margin quickly.
Watching margin on MetaTrader 5.
MT5 shows your margin figures as prices move, on desktop, web and mobile.
See your numbers.
On desktop, open the Trade tab in the Toolbox. It shows balance, equity, margin, free margin and margin level.
Check an instrument first.
In Market Watch, right-click the instrument and choose Specification for its contract size, margin and swap.
Work out the trade before you place it.
The FX calculator works out the margin, position size and swap for a trade.
Set a stop-loss.
A stop-loss can close a losing trade in normal markets well before a stop-out would act.
Questions, answered.
What traders ask most about margin trading.
01What is the difference between margin and leverage?
02How much leverage can I use?
03Can I lose more than my margin?
04What happens at a stop-out?
05Do I own the asset when I trade a CFD?
06Can I practise margin trading first?
See margin at work on a demo.
Open a position on a free MT5 demo and watch your margin level move with the price before you trade with real money.
Trading CFDs on a live account puts your capital at risk and you can lose money. A demo does not.