What is Leverage and Margin in Forex: The Easy Explanation

When investing in the forex markets as a new trader, you must have had the curiosity to understand what is leverage and margin. And rightly so, as one must understand the meaning of these basic forex trading terms before making any investments whatsoever.

Hence, we decided, to provide in this blog, an easy explanation to - what is leverage and margin?

So, one of the primary reasons people are attracted to forex trading, is the high leverage available in the said market, which eventually elevates your purchasing power exponentially, while trading.

But how?

Let’s first understand what margin and leverages are, in the simplest of words!

What is margin in forex?

In simple words, it is the amount of deposit that you need to make in your trading account before investing in the forex markets. This amount is decided by the broker that offers you the platform for trading. Different brokers can charge different amounts as ‘margin’, basis the volume of trade you indulge into, or the time of the week you select to trade. There are other factors as well that affects the margin percentage.

Now comes the time to explore the other forex trading term to be discussed under ‘what is leverage and margin’, and which is – ‘leverage’.

What is leverage in forex?

Leverage is the purchasing power that your forex broker offers you against the margin amount submission that you make to your forex trading account. For instance, if you submit USD 1000 as the margin amount in order to make a trade in the forex markets, your broker might offer you a leverage ratio of 100:1, i.e., you can trade up to an amount of USD 100,000.

But, in case, you start losing, and the loss amount starts exceeding the margin amount, which was, in this case, USD 1000, your broker will have to take a margin call. This means, you will not be able to trade after incurring a total loss of USD 1000, unless you put more money in your trading account to re-start trading.

In this example, the broker gave you a leverage of trading 100 times in monetary value than what you initially submitted as ‘deposit amount’ in the form of ‘margin’.

We hope, now you have finally understood about – ‘what is leverage and margin’.

Now that we understand leverage and margin, we will talk about – ‘leverage and margin trading’.

Leverage margin example in forex trading

If we can make you understand by an example, how leverage and margin trading work in the forex markets, that would be the most suited for you to understand the said concept.

So, here is an example for the same.

A trader buys GBP/USD predicting that the exchange rates will go up in his favour. He buys GBP/USD at an ask price of $1.15. Presuming that the rates moved as per his expectations, the investor would close the position a couple of hours later by selling the exact amount of GBP/USD back to forex broker by stating the bid price. The variance among the buy and sell rates would entail the loss or gain on the said trade.

Traders utilise leverage to maximize their profits in the forex markets, as it falls under the niche of trading markets that present the highest degree of leverage.

We hope that by now, we must have been able to help you get your head around – ‘what is leverage and margin’. Till we come up with a new blog post on the forex markets, we bid you a goodbye. Cheers!

Hello, for being a professional in financial markets for last 12 years, now I am keen to share my knowledge of finance and trading industry through my articles.