By borrowing money from a broker, investors can trade larger positions in a currency. As a result, leverage magnifies the returns from favorable movements in a currency’s exchange rate. However, leverage is a double-edged sword, meaning it can also magnify losses. It’s important that Forex traders learn how to manage leverage and employ risk management strategies to mitigate Forex losses.
Leverage, which is the use of borrowed money to invest, is very common in Forex trading.
By borrowing money from a broker, investors can trade larger positions in a currency.
However, leverage is a double-edged sword, meaning it can also magnify losses.
Many brokers require a percentage of a trade to be held in cash as collateral, and that requirement can be higher for certain currencies.
Leverage simply allows traders to control larger positions with a smaller amount of actual trading funds. In the case of 50:1 leverage (or 2% margin required), for example, $1 in a trading account can control a position worth $50. As a result, leveraged trading can be a “double-edged sword” in that both potential profits as well as potential losses are magnified according to the degree of leverage used.
Example: USD/CAD at 50:1 or 2% leverage ( in this example, if you place a 100,000 USD/CAD trade with 50:1 leverage, your margin requirement will be $2000. Trade Size: 100,000 Margin: $2,000 Trade Size: 10,000 Margin $200 and Trade Size 1,000 Trade Size $20. *Required Margin. Required margin is the minimum account balance needed to hold a position.