Leverage and margin: how much of the trade is yours
What you learn in 3 minutesLeverage sets how large a position your deposit can hold. Margin is the part of your money locked against that position while it stays open. On one standard lot of EUR/USD at 1.0850, one pip is worth about KSh 1,300, so the size you choose changes what a small move costs you.
One lot of EUR/USD at two leverage settings
| Step | Amount | Note |
|---|---|---|
| Position size | 1 standard lot | 100,000 units of EUR/USD, the usual contract size |
| Exchange rate used | 1.0850 | the price of EUR/USD in US dollars |
| Notional value in US dollars | $108,500 | 100,000 x 1.0850 |
| Margin at 1:30 | KSh 470,080 | $108,500 divided by 30, then converted at about KSh 130 per dollar |
| Margin at 1:500 | KSh 28,210 | $108,500 divided by 500, then converted at about KSh 130 per dollar |
| Difference in locked money | KSh 441,870 | KSh 470,080 minus KSh 28,210 |
The broker may round the margin figure, add a small buffer, or charge a spread or commission on top. The shilling conversion rate used here is an example and varies.
The mistake people make here
The common mistake is to treat high leverage as free money and open the largest position the account allows. That leaves almost no free margin, so a small move against the trade can trigger a margin call or close the position. Instead, work out the margin first, then check that your free margin is several times larger than the margin you are locking. If the numbers do not fit, reduce the position size rather than raising leverage.Check yourself
A trader has KSh 65,000 and uses 1:100 leverage on one standard lot of EUR/USD at 1.0850. The notional value is $108,500 and the rate is KSh 130 per dollar. What is the margin in KSh?
$108,500 divided by 100 is $1,085. Multiply by 130: the margin is about KSh 141,050, which is more than the deposit, so this position does not fit.
If one pip on one standard lot is about KSh 1,300, what is the pip value on 0.10 lots?
KSh 1,300 x 0.10 = KSh 130 per pip.