Forex FAQ

What is margin and leverage in Forex trading?

When beginners learn to trade Forex, one of the first terms they are bombarded with are leverage and margin requirements. In short, leverage is the amount of (virtual) money your broker allows you (the trader) to borrow during the course of your trading activities. For example, if your broker advertises 1:100 leverage (sometimes written 100:1), it means that for every $10 of cash that you deposit into your account, you are allowed to trade $1000 worth of currency.


This is, of course, an approximation since the actual number will depend on the current price of the base currency (and the quote currency if it doesn't match your account denomination) but this is the basic idea.

The purpose of this is to allow a trader to profit from relatively small movements in the Forex pair by putting up roughly the amount of money that will be risked plus a little collateral on top of that in case of unforeseen events.

Margin or margin requirement just refers to the amount of money or account value that you need to deposit in order to trade with leverage. In the above example, the $10 would be your margin. In reality, a trader would deposit more than just the margin requirement since you will need funds to absorb any drawdowns. So despite the hype from advertisement, we never recommend that you use the maximum leverage offered by your broker. Always practice sound money management strategies and risk only a percentage of your risk capital per trade based on a sound risk management method, not based on the maximum you have access to. (Always consider your risk of ruin - you can't trade if your account drops to zero from over-use of leverage.)

As you may already know, leverage and margin trading are not unique to the currency trading world since leverage is also used heavily in the futures, options, and stock markets - especially by day traders who capitalize on the tiny intraday movements in those markets which need to be amplified to make their work worth while.

Leverage is often misunderstood by outsiders but it's a practical tool for professionals as well as a potential danger if misused.

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