How to Calculate Risk & Margin

Hello,

In this post, I’ll show you how to calculate Risk and Margin—two of the most important concepts in trading. Risk tells you how much money you could potentially lose on a trade, while Margin tells you how much capital your broker requires to open that trade. I’ll also explain how Leverage influences Margin and why it’s crucial to understand its effects.

If you’d like to go further, check out my next post where I explain how to monitor Risk across using data published to a FxBlue track record page.

Basic Definitions

  1. Lots (Contracts): The standard unit used to measure how much of an asset you are trading. Brokers don’t ask how much money you want to risk; instead, they ask how many lots you want to trade. You then calculate your Risk and required Margin to determine the appropriate number of lots. The minimum tradable lot in CFDs is usually 0.01, though it may vary depending on the broker and asset.
  2. Lots to Trade (Position Size): The number of contracts used in a trade, based on your risk and account size.
  3. Lot Size (Contract Size): The amount of the underlying asset represented by 1 lot. This value is defined by the broker. Examples:
    • 1 lot of XAUUSD: 100 ounces of Gold
    • 1 lot of USDMXN: 100,000 USD
    • 1 lot of GBPJPY: 100,000 GBP
  4. Entry Price: The price at which you open a trade.
  5. Stoploss Price: The price at which the trade will automatically close to limit losses.
  6. Risk: The amount of money you are willing to lose if the trade reaches your Stop Loss. This is determined before entering the trade and is essential for controlling losses.
  7. Margin: The money you must have in your account to open a trade. It depends on your lots to trade, lot size, entry price, and leverage.
  8. Leverage: A tool that lets you control a larger position with a smaller amount of capital. While it amplifies potential profits, it equally magnifies potential losses.
  9. Conversion Rate: The exchange rate used to convert the value of a trade or its risk from the quote currency into your account currency. This is necessary when your account currency differs from the trade’s quote currency. In real-world scenarios, this number fluctuates in real time, but for simplicity, we will assume it is fixed in the examples in this post.

Risk & Margin

When opening a trade, it’s good practice to first calculate the Risk and then check whether you can afford that position by calculating the Margin.

To make this clear, I’ll first explain the concepts and then walk you through some examples.

Risk

With this formula, we determine how many lots should be used in a trade to match our desired monetary risk. In other words, we are calculating the Lots to Trade that align with the chosen Risk.

$$
Lots\ to\ Trade=\ \frac{Risk\ ($)\ \times\ Conversion\ Rate} {|\ (Entry\ Price\ -\ Stoploss\ Price)\ |\ \times\ Lot\ Size }
$$

Margin

Once we have calculated the Lots to Trade, we can then check whether our account has enough funds to cover the Margin required to open the trade.

$$
Margin\ ($)\ =\ \frac{Lot\ to\ Trade\ \times\ Lot\ Size\ \times\ Entry\ Price} {Leverage\ \times\ Conversion\ Rate}
$$

Example 1: XAUUSD (Gold)

Let’s say we want to buy Gold while it’s currently at $1,000 and set a stoploss at $900. We want to risk $500 of our account. Our account is using 1:1 leverage.

  • Entry Price: $1,000
  • Stoploss Price: $900
  • Risk: $500
  • Conversion Rate: $1
  • Lot Size: 100 ounces
  • Leverage: 1

Risk

Step 1: Substitute the values into the Risk Formula

$$
Lots\ to\ Trade=\ \frac{$500\ \times\ $1} {|\ ($1,000 -\ $900)\ |\ \times\ 100 }
$$

Step 2: Solve the Parenthesis

$$
Lots\ to\ Trade=\ \frac{$500} {$100 \times 100 }
$$

Step 3: Solve the Division

$$
Lots\ to\ Trade=\ \frac{$500} {$10,000 }
$$

Step 4: Final Result

$$
Lots\ to\ Trade= 0.05
$$

This means we need to open 0.05 lots (5 ounces of Gold) to risk $500 with a stoploss at $900.

Margin

  • Lots to Trade: 0.05

Step 1: Substitute the values into the Margin Formula

$$
Margin\ ($)\ =\ \frac{0.05 \times 100 \times $1,000} {1 \times $1}
$$

Step 2: Solve the Multiplications

$$
Margin\ ($)\ =\ \frac{$5,000}{$1}
$$

Step 3: Solve the Division – Final Result

$$
Margin\ ($)\ =\ $5,000
$$

So, the required margin for this trade is $5,000.

With 1:1 leverage, you need the full $5,000 to open the trade. With 1:100 leverage, the margin would only be $50, demonstrating how leverage reduces margin requirements without changing the actual risk.

Example 2: USDMXN

Let’s say we want to buy USDMXN while it’s currently at 18.50 and set a stoploss at 18.00. We want to risk $500 of our account. The account is denominated in USD, so we must include the conversion rate. Leverage is 1:100.

  • Entry Price: 18.50
  • Stoploss Price: 18.00
  • Risk: $500
  • Conversion Rate: 18.50
  • Lot Size: 100,000 USD
  • Leverage: 100

Risk

Step 1: Substitute the values into the Risk Formula

$$
Lots\ to\ Trade = \frac{500 \times 18.50}{|(18.50 - 18.00)| \times 100,000}
$$

Step 2: Solve the Parenthesis

$$
Lots\ to\ Trade = \frac{500 \times 18.50}{0.50 \times 100,000}
$$

Step 3: Multiply and Simplify

$$
Lots\ to\ Trade = \frac{9,250}{50,000}
$$

Step 4: Formula Result

$$
Lots\ to\ Trade = 0.185
$$

Step 5: Truncate to Two Decimals

$$
Lots\ to\ Trade = 0.18
$$

This means we need to open 0.18 lots (equivalent to controlling $18,000 worth of MXN) to risk slightly less than $500 with a stoploss at 18.00.

Margin

  • Lots to Trade: 0.18

Step 1: Substitute the values into the Margin Formula

$$
Margin\ ($)\ =\ \frac{0.18 \times 100,000 \times 18.50}{100 \times 18.50}
$$

Step 2: Solve the Multiplications

$$
Margin\ ($)\ =\ \frac{333,000}{1,850}
$$

Step 3: Solve the Division – Final Result

$$
Margin\ ($)\ =\ 180
$$

So, the required margin for this trade is $180.

Example 3: GBPJPY

Let’s say we want to sell GBPJPY while it’s currently at 198.758 and set a stoploss at 199.848. We want to risk $500 of our account. The account is denominated in USD, so we include the conversion rate (JPY → USD = 150). Leverage is 1:100.

  • Entry Price: 198.758
  • Stoploss Price: 199.848
  • Risk: $500
  • Conversion Rate: 150
  • Lot Size: 100,000 GBP
  • Leverage: 100

Risk

Step 1: Substitute the values into the Risk Formula

$$
Lots\ to\ Trade = \frac{500 \times 150}{|(198.758 - 199.848)| \times 100,000}
$$

Step 2: Solve the Parenthesis

$$
Lots\ to\ Trade = \frac{500 \times 150}{1.09 \times 100,000}
$$

Step 3: Multiply and Simplify

$$
Lots\ to\ Trade = \frac{75,000}{109,000}
$$

Step 4: Formula Result

$$
Lots\ to\ Trade \approx 0.688
$$

Step 5: Truncate to Two Decimals

$$
Lots\ to\ Trade = 0.68
$$

This means we need to open 0.68 lots (controlling 68,000 GBP worth of JPY) to risk slightly less than $500 with a stoploss at 199.848.

Margin

  • Lots to Trade: 0.68

Step 1: Substitute the values into the Margin Formula

$$
Margin\ ($) = \frac{0.68 \times 100,000 \times 198.758}{100 \times 150}
$$

Step 2: Solve the Multiplications

$$
Margin\ ($) = \frac{13,509,144}{15,000}
$$

Step 3: Solve the Division – Final Result

$$
Margin\ ($) \approx 901
$$

So, the required margin for this trade is $901.

Final Thoughts & Key Takeaways

  1. Risk comes first: Always calculate how much money you are willing to lose before considering potential profits. Position sizing through the risk formula helps you avoid blowing up your account.
  2. Margin ≠ Risk: Margin is only the entry ticket to open a trade. Your real risk is defined by your stoploss and the position size you choose.
  3. Leverage is a double-edged sword: While higher leverage reduces the margin required, it does NOT reduce potential losses. Use leverage wisely, as it can tempt you to open larger positions than they should.
  4. Conversion rates matter: When trading assets quoted in a different currency than your account, the conversion rate affects both your risk and margin. Fluctuations can shift your actual exposure.
  5. Stoploss placement is crucial: The farther your stoploss, the smaller the position size must be to maintain the same risk. A tighter stoploss allows for a larger position size.
  6. Check margin availability: Even if your risk and position size are correct, insufficient margin will prevent execution. Always leave a safety buffer.
  7. Beware of margin calls: If your account balance falls below the margin requirement, the broker may automatically close your positions.
  8. Trading is not fast money: Even with careful calculations, profits are gradual and require discipline. The goal is to survive long enough in the market for your edge to play out.

If you’d like to continue, the next post shows how to monitor Risk directly from an FxBlue track record page.