Forex Leverage

Forex leverage is a way for traders to borrow funds to gain greater exposure to the forex market. With limited funds, they can control larger transaction sizes. Forex trading has some of the lowest margin rates in the financial market. The use of leverage in forex trading, also known as forex margin, means that if the market moves in your favor, you can expand your profits; however, if the market moves against you, you may also Lose all funds. This is because profit and loss are based on the full value of the transaction, not just the deposit amount.

Leverage Ratio

Leverage is usually given as a fixed amount and may vary from broker to broker. Every broker offers leverage according to their rules and regulations. Common leverage ratios are 50:1, 100:1, 200:1 and 400:1.

50:1

50:1 leverage means that for every $1 you have in your account, you can make trades worth up to $50. For example, if you deposit $500, you can trade up to $25,000 on the market.

100:1

100:1 leverage means that for every dollar in your account, you can make trades worth up to $100. This ratio is the typical amount of leverage offered by a standard lot account. The typical minimum deposit for a standard account is $2,000, giving you control of $200,000.

200:1

200:1 leverage means that for every $1 you have in your account, you can make trades worth up to $200. A 200:1 ratio is the typical amount of leverage offered on a mini lot account. The typical minimum deposit for this type of account is around $300, and you can trade up to $60,000 with it.

400:1

400:1 leverage means that for every $1 you have in your account, you can make $400 worth of trades. Some brokers offer mini lot accounts of 400:1; however, be wary of any broker that offers this type of leverage for small accounts. Anyone who deposits $300 into a Forex account and attempts to trade with 400:1 leverage is likely to lose everything within minutes - a trade that loses $300 at this ratio could cost you $120,000.

How to Use Leverage for Forex Trading?

1. To trade Forex with leverage, you need to choose an appropriate leverage ratio and calculate the currency position you can control based on your margin. For example, if you wanted to buy the equivalent of $10,000 in Euro/USD (EUR/USD) with 5% margin and 50:1 leverage, you would only need to pay $500 as margin and the broker would lend you the rest. $9,500.

2. When you open a leveraged transaction, you need to pay close attention to market changes and your account balance. If the market moves in your favor, you can close your position at the appropriate time and take a profit. For example, if you buy the equivalent of USD 10,000 in EUR/USD and the exchange rate rises from 1.10 to 1.11, you can sell your position and make a profit of USD 100.

3. However, if the market moves against you, you may be exposed to losses and liquidation. For example, if you buy the equivalent of $10,000 in EUR/USD and the exchange rate falls from 1.10 to 1.09, you will lose $100. If the market continues to decline and your account balance falls below or equals 100% of the margin requirement, you will receive a margin call and your position will be automatically closed.

Pros of Using Leverage

Magnify Profits

You only need to invest a fraction of the trade value to get the same profit as traditional trading. Since profit is calculated using the full value of the position, margin can be multiplied by returns on successful trades, but can also be multiplied by losses on failed trades.

Leverage Opportunities

Using leverage frees up capital that can be used for other investments. The ability to increase the amount of money available for investment is called leverage.

Short Market

Use leveraged products to speculate on market movements, allowing you to benefit from falling markets as well as rising markets; this is called shorting.

24 Hours Trading

While trading hours vary by market, some markets – including key index, forex and cryptocurrency markets – can be traded around the clock.

Cons of Using Leverage

Magnify Losses

Margin magnifies losses and profits, and since your initial outlay is relatively small compared to traditional trading, it's easy to lose track of the amount of capital you're putting at risk. Therefore, you may consider your trade based on its full value and potential downside risk, and take steps to manage your risk.

Margin Call

If your position moves against you such that your margin requirements exceed your net account capital, your provider may require additional funds from you to keep your trade open. This is called a margin call and you need to add capital or exit the position to reduce your total risk exposure. 

Funding Charges

When you use leverage, you are essentially lending money to open the entire position for a fee of your margin. If you wish to hold a position overnight, you will be charged a small fee to cover the cost of doing so.