Forex Leverage and Margin

It takes a lot of money to move the Forex markets. Learn how leverage and margin can accelerate your trading and protect your account.

What is Forex Leverage?

Investing in currencies takes massive amounts of money to generate a small return. For example, when trading EUR/USD, you would have to tie up $100,000 to make $100 on a 10-pip move. That’s a lot of cash that most people don’t have.

Forex Broker to the Rescue!

Your broker does have that kind of cash and is willing to lend it to you in exchange for fees. This is called leverage, and with most forex accounts, it’s a big lever.

Of course, there are limits. Most forex brokers offer a maximum leverage of up to 1:100, which means for every dollar (or currency unit) in your account, you’ll get to leverage $100 of their money.

Leverage Example:

Say you have $1,000 in your Forex account. With a 1:100 leverage, you can trade up to $100,000 (one lot). So, in the previous example of the EUR/USD trade, you’ll use your $1,000 to help cover that $100,000. The broker puts up the rest.

So, you can now see how leverage gives you, as a trader, a considerable advantage. However, it also means you speed up the process of potentially losing that $1,000. This is where margins come in.

Forex Margins

Margin is the amount of money you need in your account to keep your positions open. It protects the broker against losses and ensures that you will not be able to lose more than what’s in your account.

Your broker sets margin limits on how much you can leverage based on factors, including:

• Currency pair traded
• Time of day
• Timeframe
• Expected volatility
• One-off news events

Margin Call

Suppose you start losing money while you’re in a trade. In that case, the broker will automatically close your position when you reach your margin limit. This is a margin call and will be initiated well before your account runs out of money. It protects both you and your broker from excessive loss.