What is Leverage and Margin in Forex Trading?

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What is Leverage and Margin in Forex Trading?
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Index

• What is Leverage and Margin in Forex Trading?
• Leverage Trading
• Margin Trading
• Profits Losses With Leveraged Trading

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What is Leverage and Margin in Forex Trading?

• Forex leverage and margin very important in forex
  trading. If the broker gives high leverage, then
  you understand margin rules of Forex Broker.
• Lets discuss leverage and margin and the
  difference between the two.

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Leverage Trading

• Forex Leverages and Margins trading is the
  facility to be able to trade for significantly
  higher amounts than what you have in the account.
  
• We can define leverage as the extent of open
  positions that you are allowed to create in the
  market against a given amount of the margin
  deposit.

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• If the broker is allowing you leverage of 501,
  then it means you only have to put up the initial
  margin of 2 of the value of the position you
  want to trade.
• Assuming your account currency is USD and value
  of the position was 50,000 then the broker would
  earmark 2 of 50,000, i.e. 1,000 from your
  account towards the margin deposit.

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• In effect, the broker funded your position for
  49,000 the amount of capital you may be said to
  have borrowed for position.

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Margin Trading

• Because of the leverages offered, Margin trading
  is a facility provided by a Forex broker to his
  clients so they may trade without having to put
  up the whole capital required for their position.
  
• The client is, therefore, trading with borrowed
  capital.

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• However, the broker will always demand a
  specific, small deposit of money, called the
  margin deposit to be paid by client before the
  position can be taken.
• This deposit, which may be as low as 1-2 of the
  value of the total position, is the only initial
  investment required of the client.

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• The broker earmarks the amount and sets it inside
  the position taken by client.
• When the position is squared up by client at a
  profit/loss, the margin is released back, along
  with credit for the profit/loss on the
  transaction.

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Profits Losses With Leveraged Trading

• Leverage is a double edged sword while your
  profits would be increased and multiplied with
  the same amount, say 50 times in the above
  example, same would be right for losses if your
  trade goes to the south.
• Hope you understand what is the use of leverage
  and margin in trading forex.

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Thank You