Leverage doesn't give you money: it lets you open a position bigger than your account balance while your broker locks up part of its value as collateral, called margin. A margin call is the warning you get when losses shrink your account's equity too close to that locked-up margin, and if the losses keep growing, the broker closes your positions for you.

Almost every misunderstanding about leverage starts with that first point, so it's worth getting straight. Profit and loss are still calculated on the full size of the position, but they come out of, and go into, your much smaller account. That is what wipes accounts out overnight, and below we'll walk through exactly how it happens.

Margin, equity and margin level

There are three numbers here. Once you know them, the whole picture becomes clear:

  • Used margin: the money locked up for your open positions. The higher the leverage, the smaller this number.
  • Equity: your account balance plus the open profit or loss on your positions. It moves with the market every second.
  • Margin level: your equity divided by your used margin, shown as a percentage. This is the number your broker watches.

When the market moves against you, equity falls but used margin stays the same, so your margin level drops. When it reaches your broker's warning threshold, that's a margin call. If it keeps falling and hits a second, lower threshold, the broker closes your positions itself. That is called a stop out, or liquidation.

Here's the part that matters: at that point you are not the one deciding when to get out. The broker is, and it happens at exactly the moment the trade looks its worst.

So is high leverage bad?

That question starts from a false premise. High leverage is not the risk in itself; a large position is, and high leverage is simply what makes a large position possible. For the same position size, higher leverage actually locks up less margin, which leaves your margin level higher, not lower.

If you base each trade's size on the amount you are willing to lose and the distance to your stop loss, as we explain in what a lot is and how to size a position, the leverage on your account becomes almost irrelevant: it only decides how much of your money gets locked up. But if you pick your size based on "how much can I open", high leverage multiplies the speed at which you reach zero.

Regulators have seen the same thing. Since August 2018, EU rules first set by the European Securities and Markets Authority (ESMA) have capped leverage for retail clients at 30:1 on major currency pairs, 20:1 on non-major pairs, gold and major indices, 10:1 on other commodities and non-major indices, 5:1 on individual stocks and 2:1 on crypto. The same rules force providers to start closing a retail client's positions once the account's equity falls to half of the margin its open positions require (a margin level of 50%), and to publish the percentage of their retail accounts that lose money. See ESMA's final measures (opens in a new tab) and the FCA's explanation of CFD risk (opens in a new tab).

How an account actually gets wiped out

Take a $1,000 account with 500:1 leverage. The trader opens one standard lot on a pair like EUR/USD, because they "can". The margin locked up is small, so the account still seems to have plenty of room. But every pip is worth about $10, which means 1% of the entire account per pip.

An ordinary 30-pip move against the position takes 30% of the account. A news release that sends price 100 pips the other way takes essentially all of it. And because price can jump straight past levels in a fast move, even a stop loss is not guaranteed to fill at the price you set. The CFTC's advisory on retail forex (opens in a new tab) is blunt about where leverage like this leads: you can lose all of your margin, and more.

There was no bad analysis anywhere in this story. Only the size was wrong.

A trap that hits small accounts hardest

The smaller the account, the stronger the pull toward high leverage, because with a sensible size "the profit isn't worth it". This is exactly the trap we describe in how much money you need to start trading: high leverage doesn't make up for a small account, it only shortens the road to zero.

Leverage isn't a sharper knife. It's a shorter handle: the same cut, with less distance between the blade and your hand.

Summary

Leverage makes your position bigger, not your capital. Margin level is the number that decides when your broker starts making decisions for you, and the only way to stay well clear of that point is to base your size on risk, not on the maximum you are allowed to open.

Before every trade, work out your size with the risk calculator, and read the risk disclosure once, all the way through. If you want a solid grasp of how orders, lots and margin actually work, trade mechanics in the academy is the place to start.