Risk warning. CFDs and leveraged FX carry a high risk of rapid loss and a majority of retail investor accounts lose money. General information, not financial advice.
Short answer: margin is the part of your own balance the broker locks up while a trade is open, and leverage decides how big that part is. Margin = position value / leverage. One standard lot of EUR/USD at a price of 1.1000 is worth $110,000, so at the 30:1 retail cap in the EU, the UK and Australia it ties up $3,666.67 of margin. Profit and loss, though, is calculated on the full $110,000, at $10 a pip. That gap between what you put up and what you are exposed to is the whole subject.
Leverage is the concept most responsible for blown retail accounts, and it is almost always explained backwards — as a feature that lets you trade bigger, rather than as the mechanism that decides how small a price move can end your position.
This is the version that treats survival as the point.
Two words that are not the same thing
Leverage is a ratio. It describes how much position you can control per unit of your own money. At 30:1, one unit of your money supports thirty units of position.
Margin is money. It is the amount of your balance the broker holds against an open position while it is open. It is not a fee and it is not borrowed cash you pay interest on — it is your own funds, reserved.
The ratio decides the margin. The formula is the whole subject in one line:
Margin required = notional value of the position / leverage
Everything else follows from that.
The arithmetic, worked all the way through
Take one micro lot of a major pair — 1,000 units of the base currency, so a notional of roughly 1,000 units of account currency. At the retail cap of 30:1 for major currency pairs, the margin required is 1,000 / 30, which is about 33 units.
Now the second number, which is the one people skip. Your profit and loss is calculated on the full notional, not on the margin. On a pair quoted to four decimal places against the US dollar, one pip on a micro lot is $0.10 — again, arithmetic: 0.0001 x 1,000 = 0.10.
So a 100-pip move against you costs $10 on a position where you reserved about $33. You have lost roughly 30% of the money reserved against that trade on a move that a major pair can make in a single ordinary session.
Scale it up and the point sharpens. On a standard lot at the same 30:1 cap, the notional is 100,000, the margin is about 3,300, and one pip is $10. A 330-pip move — large, but not remotely unheard of — costs the entire margin.
Leverage did not make you more likely to be right. It changed how far the market can travel before your being wrong becomes terminal.
The caps are set by law, not by the broker
For retail clients in the EU and the UK, leverage is a regulated ceiling rather than a competitive feature. ESMA's product intervention of 27 March 2018 fixed the limits at:
| Instrument class | Retail leverage cap |
|---|---|
| Major currency pairs | 30:1 |
| Non-major currency pairs, gold and major indices | 20:1 |
| Commodities other than gold, and non-major equity indices | 10:1 |
| Individual equities and other reference values | 5:1 |
| Cryptocurrencies | 2:1 |
The FCA's permanent rules, in force from 1 August 2019, require firms to limit retail leverage to between 30:1 and 2:1 on the same volatility basis.
Outside Europe the numbers are similar in spirit and different in detail:
| Where you are a retail client | Cap on major currency pairs | What counts as "major" | Source and start date |
|---|---|---|---|
| EU (ESMA measures, now national rules) | 30:1 | Major currency pairs | ESMA, 27 March 2018 |
| United Kingdom | 30:1 (range 30:1 to 2:1) | Major currency pairs | FCA, rules in force 1 August 2019 |
| Australia | 30:1 | Any two of AUD, GBP, CAD, EUR, JPY, CHF and USD | ASIC product intervention order, from 29 March 2021 |
| United States | 50:1 (a 2% security deposit) | GBP, CHF, CAD, JPY, EUR, AUD, NZD, SEK, NOK and DKK; 5% (20:1) on other currencies | NFA Financial Requirements Section 12 |
Two details catch people out. Australia counts the Australian dollar as a major, so AUD/USD gets 30:1 there and 20:1 under the ESMA list. And the US figure is a minimum deposit, not a ceiling the broker must offer: NFA's rule lets its Executive Committee raise requirements temporarily in extraordinary market conditions.
Read the table as a statement about the instruments rather than about you. The reason equities get 5:1 and majors get 30:1 is that the regulator's view of how far each can move in a day differs by a factor of six. If you are trading a 5:1 instrument, the market is telling you something before you place the order.
Offshore entities advertise far higher numbers, and offshore broker leverage explained covers what you are actually accepting when you take them. Leverage caps by instrument has the full per-class breakdown.
The two protections, and exactly what they do
Both are commonly misread as safety nets. They are floors, not nets.
The margin close-out rule. ESMA required, and the FCA's permanent rules require, that a firm closes a client's positions when funds fall to 50% of the margin needed to maintain them. This stops a losing account running to zero and beyond. It does not consult your analysis. If your position is right but early, the close-out still fires, and the trade you were correct about is closed at a loss before it works.
That is the mechanism behind the most common complaint in retail trading — "I was right but I got stopped out". Usually the position was simply too large for the balance, and the close-out did what it was built to do.
Negative balance protection. The rules require firms to guarantee that a retail client cannot lose more than the total funds in the CFD account. It is real, it matters most in a gap when there is no price between your stop and the next print, and it is a floor at zero rather than protection against losing everything you deposited.
How many pips until the close-out? A worked example
The close-out rule turns position size into a distance. Take a $1,000 account, EUR/USD at 1.1000, the 30:1 retail cap, and nothing else open. The broker closes you out when your equity (balance plus or minus open profit and loss) falls to 50% of the margin the position requires.
| Position | Notional | Margin at 30:1 | Close-out when equity falls to | Loss you can absorb | Pip value | Pips to close-out |
|---|---|---|---|---|---|---|
| 0.05 lot | $5,500 | $183.33 | $91.67 | $908.33 | $0.50 | about 1,817 |
| 0.10 lot | $11,000 | $366.67 | $183.33 | $816.67 | $1.00 | about 817 |
| 0.25 lot | $27,500 | $916.67 | $458.33 | $541.67 | $2.50 | about 217 |
The arithmetic for the last row: margin is $27,500 / 30 = $916.67. Half of that is $458.33. The account can lose $1,000 - $458.33 = $541.67 before the close-out fires, and at $2.50 a pip that is $541.67 / $2.50 = 216.7 pips.
Five times the position did not cut the room by a fifth. It cut it from about 1,817 pips to about 217, because a bigger position both loses faster per pip and needs a higher equity floor. The table simplifies on purpose: it ignores the spread, commission and overnight financing, all of which eat into the same equity, and the margin on a EUR/USD position also drifts as the exchange rate moves.
Overnight financing follows the notional too. The swap a broker charges or credits is calculated on the full position value, so a 0.25 lot pays a quarter of a full lot's swap every night while tying up only $916.67 of your money. Over a week that cost lands on the same equity the close-out watches; forex swap and rollover fees explained shows how the charge is set.
More detail in the margin close-out rule explained and ESMA rules explained.
The counter-argument: low leverage does not make you safe
This is the part that gets left out of every beginner explainer, and it is the more important half.
Leverage is a ceiling on position size, not a description of it. A trader on 30:1 who opens one micro lot on a small account is taking far less risk than a trader on 5:1 who opens ten standard lots on the same balance. The cap constrains the maximum; you choose where inside it to sit, and almost nobody sits near the ceiling deliberately.
So "use low leverage" is imprecise advice. The precise version is size the position from the stop, not from the margin available. Decide what percentage of the account you are willing to lose on this trade, decide where the idea is wrong and the stop belongs, and let those two numbers determine the size. The margin requirement is then whatever it is. Worked in full in how to calculate position size and forex risk management and position sizing.
Done this way, leverage stops being a dial you set and becomes what it actually is: the reason a small account can access a market with a large minimum contract size at all. If your balance cannot support the smallest position your broker offers at a sane stop distance, the answer is a smaller lot size, not more leverage — see what is a nano lot in forex.
Where this discipline gets tested for money
Proprietary trading firms run evaluations that are, stripped of the marketing, a test of exactly this: whether you can respect a daily loss limit and a maximum drawdown under pressure. They are not brokers and they are not regulated as brokers. If you are considering one, read best forex prop firms and prop firm challenge rules that fail you before you pay a fee.
The bottom line
Margin is notional divided by leverage. Profit and loss is calculated on the notional, not the margin. The close-out fires at 50% of required margin whether or not you were about to be right. Size from the stop, check the free margin the trade leaves behind, and treat a low regulated cap on an instrument as information rather than an inconvenience.
Risk Warning
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 51-89% of retail investor accounts lose money when trading CFDs. Leverage causes the majority of retail trading losses. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
This article is general information, not financial advice. Leverage caps, margin requirements and protections depend on the entity that onboards you and on your client classification — confirm both with your broker before trading.
Sources
- ESMA — agreement to prohibit binary options and restrict CFDs for retail investors, 27 March 2018 (the leverage table above, the 50% margin close-out rule and negative balance protection): esma.europa.eu
- FCA — permanent restrictions on the sale of CFDs and CFD-like options to retail consumers, in force 1 August 2019 (leverage between 30:1 and 2:1, close-out at 50% of required margin, guarantee against losing more than the funds in the account): fca.org.uk
- ESMA notice ESMA35-43-1912, Annex I (a): the 3.33% initial margin applies to pairs made of any two of the US dollar, euro, Japanese yen, pound sterling, Canadian dollar or Swiss franc. Read on esma.europa.eu, 16 October 2026.
- ASIC media release 20-254MR: the CFD product intervention order, its leverage limits and its definition of a major currency pair, from 29 March 2021. Read on asic.gov.au, 16 October 2026.
- NFA Financial Requirements Section 12: the 2% and 5% minimum security deposits for retail forex. Read on nfa.futures.org, 16 October 2026.
- ESMA and FCA pages above re-read on 16 October 2026.
Frequently Asked Questions
What is the difference between leverage and margin?
Leverage is a ratio describing how much position you can control per unit of your own money, such as 30:1. Margin is the amount of your balance the broker holds against an open position while it is open, which consists of your own reserved funds rather than a fee or borrowed cash.
What are the legal retail leverage caps for different instruments?
For retail clients in the EU and the UK, ESMA and FCA rules set leverage limits based on instrument volatility. Major currency pairs are capped at 30:1, non-major currency pairs, gold and major indices at 20:1, other commodities and non-major equity indices at 10:1, individual equities at 5:1, and cryptocurrencies at 2:1.
How does the 50% margin close-out rule work?
The margin close-out rule requires firms to close a client's positions automatically when funds fall to 50% of the margin needed to maintain them. This mechanism stops a losing account from running to zero and beyond, firing regardless of whether your trading analysis might eventually have been correct.
What is negative balance protection in CFD trading?
Negative balance protection is a rule requiring firms to guarantee that a retail client cannot lose more than the total funds in their CFD account. It acts as a floor at zero, providing safety during a gap when there is no price between your stop and the next print.
How much margin do I need to trade one lot of EUR/USD?
Divide the position value by the leverage. One standard lot is 100,000 euros, worth $110,000 at a price of 1.1000, so at the 30:1 retail cap in the EU, the UK and Australia the margin is about $3,667. Under the US 2% security deposit (50:1) it is $2,200. The profit or loss is still $10 per pip on the full position.
