Forex Leverage and Margins

Forex Trading LeverageIn forex trading, the margin is what the forex broker requires you to put up in order to open a trading position, like a good faith deposit.

Margin requirements are calculated by taking a percentage of the estimated trade size with a small buffer added to help alleviate daily/weekly fluctuations.

Note that the margin requirements for a position do not indicate the maximum you stand to lose on that position – your profit and loss is dependent on the size of the position, not the margin.

Understanding Forex Leverage

Understanding how leverage works in forex trading is important for any beginner trader, as high leverage can be a double edged sword – high leverage amplifies gains when your position moves favourably, but this also works in reverse to cause huge losses if the market reverses.

Essentially, leverage works to exaggerate any market movements, whether they are in your favour or not.

You can cap your potential losses through the use of stops, which automatically close your position when the stop conditions are breached. Forex brokers can offer tremendous leverage for currency trading, often as high as 100:1 or even 200:1 leverage.

At 100:1 leverage you can have an open position of $10,000 using just $100 account equity.

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