Leverage is market exposure
Leverage means the value of the market exposure is greater than the money initially set aside to support it. For example, a position with AUD 10,000 of exposure does not necessarily require AUD 10,000 to be deposited as margin.
This does not make the underlying price movement smaller. A one per cent move still applies to the full exposure, not only to the initial margin.
Margin is collateral, not a fee
Initial margin is the amount required to open a leveraged position. Available margin is the remaining capacity in the account after current positions, profit and loss, and applicable requirements are taken into account.
- Required margin can vary by product and market conditions
- Open losses reduce account equity and available margin
- Providers may increase margin requirements
- A margin close-out can occur before a trader expects it
A simple risk example
Suppose a trader controls AUD 20,000 of market exposure using AUD 1,000 of initial margin. A two per cent adverse move on the exposure represents AUD 400 before costs. That is 40 per cent of the initial margin, even though the market moved only two per cent.
The example is illustrative only, but it shows why position risk should be calculated from total exposure and the planned exit—not from the margin amount alone.
A better pre-trade check
- Calculate total exposure
- Define the price level that invalidates the idea
- Estimate loss at that level, including costs and possible slippage
- Compare that loss with account equity
- Consider what happens if the market gaps beyond the intended exit