Most traders think they understand leverage right up until the moment their platform closes a trade they didn't ask to close. The account still had money in it. The position wasn't that large. Yet the broker liquidated it anyway. That moment — confusing, frustrating, expensive — usually means one thing: the trader didn't truly understand the difference between balance, equity, and free margin.

Leverage lets a trader control a large position with a small deposit. A 100:1 leverage ratio means controlling $100,000 worth of currency with just $1,000 of capital. The $1,000 set aside to hold that position open is called margin — it's not a fee, it's a performance bond held by the broker. The rest of your account funds remain available, but only if you know where to look.

CONCEPTMargin is collateral, not a cost — it's your own money held temporarily to back an open position.
WARNINGFree margin drops as positions move against you — a string of losing trades can trigger a margin call before you realise it.
KEY IDEAEquity is your real-time account value. It changes every second a position is open.

Here's where it clicks. Say a trader deposits $5,000 and opens a single position requiring $1,000 in margin. Their balance stays at $5,000 — that number only changes when a trade closes. Their equity, however, moves with every tick. If the trade is currently up $300, equity is $5,300. If it's down $400, equity is $4,600. Free margin is simply equity minus the margin currently in use.

Account with $5,000 Deposit, Position Down $400 Balance $5,000 Equity $4,600 Used Margin $1,000 Free Margin $3,600 Free Margin = Equity ($4,600) − Used Margin ($1,000)

In that scenario, free margin is $4,600 minus $1,000 — leaving $3,600 available to open new trades or absorb further losses. If the position keeps moving against the trader, equity keeps falling and free margin shrinks with it. Most brokers issue a margin call when free margin approaches zero, and automatically close positions when the margin level — equity divided by used margin, expressed as a percentage — drops below their stop-out threshold, often 50%. Understanding these mechanics is well-documented at Investopedia's margin explainer, with the broader mathematical framework covered on Wikipedia's margin finance page, and leverage ratios explored further in Investopedia's leverage overview.

Knowing these three numbers — equity, used margin, free margin — before entering any trade is what separates mechanical competence from expensive guesswork.

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