Three Cases: Leverage, Position Size and Risk
With the same $1,000 of margin, losses can differ by 2x; at the same leverage, a position 5 times bigger means losses 5 times bigger.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · CFDs, lesson 7: “Three Cases: Leverage, Position Size and Risk”
With the same $1,000 of margin, losses can differ by 2x; at the same leverage, a position 5 times bigger means losses 5 times bigger.
Same margin, different risk
50 units at 5:1 and 100 units at 10:1 both have a required margin of $1,000. But the second position is twice as big, so the same 5% drop loses twice as much.
Same leverage, bigger position
At the same 10:1, going from 100 to 500 units takes margin from $1,000 to $5,000, and a 5% drop goes from losing 5% of the account to losing 25%.
Three questions before you open
What's this position worth? How much does a 5% move against me lose, and what percentage of the account is that? Where's my stop-loss? These three answers matter far more than "how much margin does it need".
Key takeaways
- 50 units at 5:1 and 100 units at 10:1 both need $1,000 of margin, but the second loses twice as much on the same 5% fall.
- At the same leverage, a position 5 times bigger means 5 times the required margin and 5 times the loss.
- Before opening a trade, work out the position value, what share of your account an adverse move would cost, and where your stop goes, rather than only looking at the margin needed.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Keep the price at −5%: how much does each of the three cases lose? What percentage of the account is each?
- Drag the price move to −10%: how much of the account does case 3 lose?
- In "Your setup", use 100:1 and 100 units: compared with case 2, how do the required margin and the loss differ?
- In "Your setup", find a leverage and size where a 5% drop costs only about 1% of the account.
Quiz and explanations
- 1. Your account is $10,000. At 5:1 leverage you open 50 units at $100, and the price falls 5%. What share of your account do you lose?
- Answer: 2.5%.Position $5,000 × 5% = $250, which is 2.5% of your account.
- 2. What's the required margin for case 1 (5:1, 50 units) and case 2 (10:1, 100 units)?
- Answer: $1,000 and $1,000.$5,000 ÷ 5 = $1,000; $10,000 ÷ 10 = $1,000. Same margin, different risk.
- 3. Two traders both hold a $10,000 position, one at 10:1 and one at 100:1. The price moves 1% against them. What are the losses?
- Answer: About $100 each.Same position, same price move, same loss. Higher leverage just uses less margin.
Terms in this lesson
- required margin (Required Margin): The funds set aside to open and hold a position = position value ÷ leverage (or position value × margin requirement).
- stop-loss (Stop Loss): Automatically closes a position when price moves against you to a preset level, capping your maximum loss.