Leverage, margin calls and order types

Leverage is what lets a small trader control a large position. Think of your broker as fronting you $100,000 to trade, in exchange for a good-faith deposit, say $1,000, that they hold but don't necessarily keep. Typical broker leverage runs from 100:1 to 200:1: for every $1,000 you deposit, you might be able to control $100,000 to $200,000.

The required deposit ("margin") varies by broker; a 1% requirement means $1,000 down for every $100,000 traded.

If your account equity drops below the margin required to keep your positions open, your broker will close some or all of them automatically, this protects both you and the broker from a runaway negative balance.

Example A: You open an account with $2,000 and take one lot of EUR/USD requiring $1,000 margin. Your usable margin, the cushion available to absorb losses or open new trades, drops to $1,000. Exceed that in losses and you're margin-called.

Example B: Same trade, but with a $10,000 account. Usable margin after the trade is $9,000, giving you much more room before a margin call.

Note the distinction between usable margin (money still free to absorb losses or fund new trades) and used margin (money locked up in existing positions). Many brokers also raise margin requirements over weekends, when markets are closed and gaps are riskier.

Leverage is commonly expressed as a ratio (100:1, 200:1) and relates to the margin percentage by:

Leverage = 100 ÷ Margin % and Margin % = 100 ÷ Leverage

An order is simply the instruction you give your platform to enter or exit a trade.

Market order, execute immediately at the current price.

Limit order, execute only at a price you specify, whenever the market reaches it; you set both a price and how long the order should remain active.

Stop-loss order, a protective order that automatically closes a losing position at a price you set, capping your downside without requiring you to watch the screen all day.

Less common but useful order modifiers:

GTC (Good 'Til Cancelled), stays active until you cancel it yourself.

GFD (Good For the Day), expires at the end of the trading day (usually 5 p.m. EST, but confirm with your broker).

OCO (Order Cancels Other), a pair of orders placed on either side of the current price; when one triggers, the other is automatically cancelled.

Most traders never need more than market, stop-loss, and limit orders. Keep your order structure simple, and make sure you're fully comfortable with your broker's order-entry system before trading real money.