Leverage Risk Worked Example
Shows how account equity, position size, leverage and entry price set the distance from entry to the margin call and the stop-out: the room a position has before the broker's warning fires and before it force-closes the position.
This page covers the calculation; it is not trading advice.
How this calculation works
Margin held = position notional ÷ leverage. The reserved margin sets two broker-defined levels: the margin call warning (commonly around 100% of margin held) and the lower stop-out level (commonly between 20% and 50%), though both vary by broker.
Free margin = account equity − margin held. That figure is the adverse P&L the account absorbs before equity falls to the margin held, a 100% margin level, where brokers commonly set the margin call warning. The stop-out sits lower, so the loss that reaches it is free margin plus the part of the margin held above the stop-out threshold.
Distance to stop-out (in pips) = (account equity − stop-out threshold) ÷ (pip value per lot × position size in lots). The margin call warning sits nearer, at the higher threshold.
Leverage, position size and account size each move the distance to both thresholds; the worked example below compares 1:100 with 1:500 on the same position, then works through a position five times larger at 1:500.
Formula
- Margin held = (lots × units per lot × exchange rate) ÷ leverage, when the account currency is the pair's quote currency (EUR/USD on a USD account); otherwise convert the notional to the account currency first
- Stop-out threshold = margin held × broker stop-out percentage (commonly 0.20 to 0.50, varies by broker); margin call threshold = margin held × broker margin call percentage (commonly around 1.00)
- Distance to stop-out (pips) = (account equity − stop-out threshold) ÷ (pip value × position size in lots), exact when the account currency is the pair's quote currency and the margin is held at its entry value; where the pip value moves with price, the result is an estimate
Worked example
$10,000 USD account, 1 standard lot EUR/USD at 1.1253, 1:100 leverage, broker stop-out at 50% of margin held and margin call warning at 100%. The figures hold the margin at its entry value and leave out spread, commission and swap. On a USD account each pip on 1 lot of EUR/USD is worth a fixed $10, so the distances are the same for a long or a short. Where the platform revalues the margin at the current price, the stop-out moves about 5 pips, to about 948 pips away for a long and 939 for a short, and the margin call about 9 pips, to about 896 and 879.
Margin held = $112,530 ÷ 100 = $1,125.30. Stop-out threshold = $1,125.30 × 0.50 = $562.65. Margin call warning = $1,125.30 × 1.00 = $1,125.30.
Distance to stop-out = ($10,000 − $562.65) ÷ ($10 × 1) = $9,437.35 ÷ $10 = 944 pips of adverse movement before the broker force-closes the position. The margin call warning fires earlier, at ($10,000 − $1,125.30) ÷ $10 = 887 pips.
Same account, same position, leverage 1:500: margin held = $112,530 ÷ 500 = $225.06. Stop-out threshold = $225.06 × 0.50 = $112.53. Distance to stop-out = ($10,000 − $112.53) ÷ $10 = 989 pips. Higher leverage holds less margin, leaving more free margin — the distance to the stop-out increases on a single position of the same size.
At 1:500 the same margin carries a larger position. If the same account opens 5 standard lots at 1:500, the position holds $1,125.30 in margin and gains or loses $50 per pip. Distance to stop-out on the 5-lot position: ($10,000 − $562.65) ÷ $50 = 189 pips. Higher leverage with proportionally larger position size shortens the distance to the stop-out.