Leverage traps and margin calls

1. 1 What leverage and margin are

   To open a position, your broker sets aside part of your money as margin. Leverage is how big a position each dollar of margin can open.

   At 1:500 leverage, $1 of margin opens $500 of position. Example on USDJPY, where the base is the US dollar: 1.00 lot is 100,000 US dollars, so the margin is $100,000 ÷ 500 = $200.

   Here is the trap: leverage changes how much margin is set aside. It does not change how much each pip is worth. A $1,000 account at 1:500 can open a 1.00 lot position, and every pip on it moves the account exactly as much as it would on a 1.00 lot USDJPY position at any other leverage.

   Quick check

   1. Question 1 · Calculation

      At 1:500 leverage, how much margin does 1.00 lot of USDJPY need? (1.00 lot = 100,000 US dollars.)

      Your answer, in US dollars

      US dollars

      Check

   2. Question 2 · Multiple choice

      What does higher leverage change?

      A.How much each pip is worth on the same lot size.B.How much margin is set aside to open the position.C.How far the price can move against you.D.Whether you need a stop-loss.

      Check

2. 2 Margin level and margin calls

   Your account panel shows margin level:

   Margin level = equity ÷ used margin × 100%

   Example: equity $1,000, used margin $200 gives a margin level of 500%. If the trade loses $700, equity is $300 and margin level is $300 ÷ $200 × 100% = 150%.

   As losses grow, margin level falls. At a level your broker sets, you get a margin call (a warning, and you may not be able to open new trades). At a lower level, the stop-out, the broker closes your positions for you. The exact levels depend on the broker and account; check them in your account’s terms.

   A stop-out is not a safety net. It closes your trade after most of the money is already gone.

   Quick check

   1. Question 3 · Calculation

      Your equity is $300 and your used margin is $200. What is your margin level?

      Your answer, in %

      %

      Check

3. 3 A real move, no stop, 1:500

   On Monday 5 August 2024, USDJPY opened its daily candle at 146.498 and traded as low as 141.676 the same day. That is a fall of 4.822 yen, or 482 pips.

   Imagine a $1,000 account that had bought 1.00 lot at the open, with no stop, at 1:500.

   • Loss at the low: 100,000 × 4.822 = 482,200 yen. At 141.676 yen per dollar that is about US$3,404, more than three times the account.
   • Suppose the broker’s stop-out were at 50% margin level. With $200 margin, that happens when equity falls to $100, a loss of $900. That is reached near 145.19, only about 131 pips below the entry, long before the low.

   With the lesson 1.4 method instead: 1% risk is $10. A stop 131 pips away would need a tiny size, around 0.01 lot ($10 ÷ (131 pips × about $6.83 a pip per lot) ≈ 0.011, rounded down). Hitting that stop the same day would have cost about $9.

   

   Open this in the terminal ↗ (opens in a new tab)

   Quick check

   1. Question 4 · Spot the mistake

      A trader with a $1,000 account at 1:500 leverage plans a USDJPY buy. Which part of the plan is the mistake?

      A.Checking the margin level in the account panel before entering.B.Opening 1.00 lot with no stop-loss because the margin needed is only $200.C.Deciding on a daily loss limit of 3% before the session starts.D.Writing the planned entry and exit in a journal.

      Check

4. 4 Daily loss limits

   Bad days happen, and after a few losses many traders start forcing trades to win it back. A daily loss limit is a rule you set in advance: once you have lost a set amount in one day, you stop trading until the next day.

   Example: with 1% risk per trade, a limit of 3% means three full losses and you are done for the day. The number is yours to choose; what matters is choosing it before the day starts.

5. 5 Watch it in a replay

   The link opens USDJPY on the D1 chart in replay mode: the chart stops at the 1 August 2024 candle (the terminal labels it 31 July 21:00 UTC, when that trading day opens) and hides everything after it, and you reveal one candle at a time with Next bar until 9 August. Replay works signed out. Its trades are simulated on a separate replay account (10,000, leverage 1:100, labelled “Replay: simulated, not on your practice account”), so nothing you do here touches your practice account.

   Place a large buy at the start with no stop, and keep the replay account (Balance, Equity, Floating) in view. An order fills at the open of the next candle. Step forward one candle at a time and watch equity fall as the yen surges on 5 August.

   Then open the link again to start over, place a correctly sized buy with a stop (the ticket’s Risk % mode sizes it for you), and compare where the account ends.

   

   Open this in the terminal ↗ (opens in a new tab)

   Practice mission

   White belt mission

   5 practice trades, every one with a stop-loss and no more than 1% risk.

   A closed practice trade counts when it had a stop-loss from the moment it opened and risked no more than 1% of the account balance at that moment. Graded symbols: EURUSD, GBPUSD, AUDUSD, NZDUSD, XAUUSD.

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