Cadet · Cadet Field Skills · About 25–35 minutes
Safety rule: A smaller margin requirement never makes a large position safe.
Your mission today
By the end you can explain leverage, calculate the cash loss from a price move, and reject an oversized demo trade.
Before you start
Complete F02.4 and open a demo account calculator. Use only the invented EURUSD figures in this lesson. Keep a notebook for the arithmetic.
1. Leverage is a tool, not extra money
Imagine using a trolley to move a heavy suitcase. The trolley helps you move the load. It does not make the suitcase lighter. Leverage is similar. A broker may let you control a position larger than the cash set aside. The full position still responds to price changes. Exposure means the amount of market value the position represents. Margin is money reserved to support the position. It is not a purchase price, a risk budget, or an insurance policy. A leverage ratio such as 1:100 describes possible exposure relative to required margin under a simplified contract. The exact margin calculation depends on the product and broker. Before touching leverage, ask three different questions: How large is the position? How much money would a price move change? How much of the account could be lost? Those questions belong on separate lines in your notebook.
2. The loss comes first: two position sizes
Use a fictional EURUSD derivative. Assume one standard lot represents EUR 100,000 and one conventional pip is 0.00010. For a USD account under this simple EURUSD example, one standard lot changes by $10 per pip. A 0.10-lot trade changes by $1 per pip. Imagine a buy entered at Ask 1.08520 with a stop that fills at Bid 1.08420. The difference is 0.00100, or 10 pips. At 0.10 lot, the planned price loss is 10 × $1 = −$10 before commission or worse execution. At 1.00 lot, exactly the same price move loses −$100 before costs. A favourable 10-pip move could instead produce +$10 or +$100. Notice what changed: position size. Nothing in the price chart became safer because the broker requested less margin.
3. Do not confuse leverage with what you might lose
Suppose a $1,000 demo account offers 1:100 leverage. A simplified EURUSD position with about $10,000 of notional exposure might require roughly $100 of margin, ignoring exchange-rate details. Notional exposure means the position's face value. If the account had only $100 reserved, that does not mean its maximum possible loss is $100. Prices can change after the order opens. A stop can fill beyond its requested trigger during a gap or fast market. The broker's actual contract terms determine liquidation rules and protections. A trader with $900 of remaining free funds can still lose money quickly. Compare the small deposit with the entire exposure rather than celebrating a high ratio. If the symbol's contract size, point value or account protections are unknown, close the order ticket and find the official specification first.
4. Size from loss, not from buying power
The responsible sequence starts with a limit on planned loss. Imagine you allow a $5 total loss budget for a demo idea. A 10-pip stop and an invented $1-per-pip position would expose $10 before fees. It does not fit. The correct response is to calculate a smaller permitted volume or skip. For example, if 0.05 lot is allowed and costs are ignored solely for this calculation, its pip value is $0.50. Ten pips would then imply −$5 of price loss. Real costs leave less room. Do not solve the problem by moving a structural stop closer just to make the position look affordable. The stop should describe where the trading idea fails. If the platform's minimum size is too large, SKIP is a successful risk decision.
5. How leverage changes the feeling of a trade
Large exposure can make small candles appear financially dramatic. That emotional pressure can lead a beginner to close winners early, widen losing stops or add another order. Each action changes the original risk. A demo account is useful because you can practise without risking savings. Set the order size before considering potential profit, and read the risk in cash. Compare an imaginary 5-pip loss on 0.10 lot, or −$5, with the same move on 1.00 lot, or −$50. The candle is identical. The financial consequence differs tenfold. If that difference surprises you, return to the symbol specification and repeat the calculation. Do not judge whether a lot is 'small' by looking at its decimal places alone. Different markets assign different cash values to one lot.
6. The decision checklist you will reuse
Before any demo order, write: current equity, precise product, contract size, Bid and Ask, intended entry, structural stop, stop distance, cash loss per unit and allowed lot step. Check spread and any separate fees. Then decide ACCEPT or SKIP. Use a real platform's specification when practising with live demo quotes; never copy our fictional pip value into another instrument. Ask someone to change the price movement from 10 pips to 25 pips. Recalculate the money at risk without changing the lot. At 0.10 lot and $1 per pip, 25 pips would imply −$25, not −$10. That test shows whether you understand the exposure rather than memorising a single example. Finally, write one sentence explaining why leverage has not increased the probability of a profitable trade.
Common mistake
A beginner sees low margin and assumes the loss will also be low. The position's pip value has not changed. Fix this by calculating the cash loss at the stop before checking margin.
Plain-English glossary
- Leverage: permission to control more exposure than the posted margin.
- Exposure: the full market value represented by the position.
- Margin: collateral reserved for a leveraged position.
- Pip: the conventional EURUSD change of 0.00010.
- Stop: an instruction to exit under specified conditions, not a guaranteed fill.
Try it yourself
Make three imaginary EURUSD tickets for 0.01, 0.05 and 0.10 lot, each with a 10-pip stop. Calculate planned price loss, identify the largest, and mark whether a $5 cash-risk limit allows each. Save the calculations and the exact contract assumption in your journal.
What you can now do
- Explain the lesson's key concept with an original example.
- Calculate the adverse result before discussing a possible gain.
- Record an independent TRADE, WAIT or SKIP decision with evidence.
Next lesson
F03.2 · Your First Written Trading Plan. Turn your risk arithmetic into a repeatable decision.
