Forex leverage explained

First of all, the word leverage comes from lever.

A lever is a simple machine that makes work easier for use; it involves moving a load around a pivot using a force. In other words, lever is a small push given in order to produce bigger impact.

Most new traders would notice that forex brokers mention leverage of 50:1, 100:1, 200:1
Leverage is a ratio of amount used in a transaction to the required deposit; a 100:1 leverage means that you can trade $100,000 in currencies with only a $1,000 deposit. If a broker offers you a 100:1 leverage on your $1,000 and you decide to trade a position worth $100,000, that means that you are borrowing $99,000 from your broker (you shell out $1,000). Your trade will be closed (margin call) as soon as your position losses 1% which is the total amount of your deposit / margin, $1,000.

Leverage is the size of a market position you can control based on your available funds or margin collateral. If the leverage ratio is 100:1 and you have $1,000 of available margin, then you’d be able to hold a position equivalent to $100,000. Now I don’t think you’d lose the $100,000 completely because there are certain measures that prevent/caution you from doing so. Note that there’s such a thing as margin call, which requires you to keep your available margin above a specified level. This means that once your available margin goes below the required margin, say 50%, then the broker will notify you to put in additional funds to bring your available margin up to that amount. The point is, in the event that you lose the entire $100,000 in a trade or series of trades, your broker will require you to put in at least as much as the minimum margin requirement. In other words, you can’t lose more than what you invested – which is your initial margin of $1000. You don’t have to pay your broker the $100,000 that you lost during the course of your trading.

Published by Editorial Team
ForexPromos Editorial Team is comprised of a selection of hand picked editors that bring you the latest breaking news from the financial markets. We also provide forex educative articles as well as comprehensive fx broker reviews.

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