What is leverage in Forex trading? Every online Forex broker offers trading with some leverage, which usually varies from 1:2 to 1:3000 with the most popular ones being 1:100 and 1:50. Leveraged trading is also called margin trading because you only need to have a margin to back your position while the rest is offered by your broker. Margin trading is considered to be more risky than unleveraged trading, but it also offers high-yielding opportunity that is sought by many Forex traders. If you trade Forex without leverage you have to spend a big deposit to open a position — you would have to deposit $100,000+ to open a position of 1 standard lot. When you trade with a leverage you can use just a fraction of that money to open the same positions — the rest of the money is "borrowed" from the Forex broker. This means that with just $1,000 and 1:100 leverage you can open $100,000 positions and gain $10 from each pip of positive difference you gain. Of course, you will also lose $10 for each pip if the price goes against you. Remember that your margin goes for margin requirement and is held by the broker for the entire period of time while your position remains open. That means that your available margin on account declines usually by 100% of the margin required for holding the position — e.g., by $1,000 for $100,000 position on 1:100 leverage. Do not forget that your position opens with a little floating loss caused by the brokers bid/ask spread. That means that if you had only $1,000 in account, your position would be immediately closed out by a margin call. So, always remember to keep enough free margin to cover your losses because your broker will not be losing its own money, it will close out your positions instead if the free margin level falls critically low.
Examples:
- With 1:500 leverage and $1,500 in your trading account, you can open a position of 5 standard lots and still have $500 left for loss toleration. But with each pip of loss costing you $50, your position will be automatically closed when its loss reaches 10 pips. After that, you will have $1,000 remaining in your account.
- With 1:50 leverage and $10,000 in your account, you open 1 standard lot position and $2,000 from your account goes for margin. $8,000 left is enough to hold against 800 pips of loss.
- With 1:2 leverage and $100,000 in your trading account, you can open 1 standard lot position with $50,000 secured as margin and $50,000 left to tolerate up to 5000 pips of loss prior to a margin call.
