What is leverage?

Leverage allows traders to borrow money and use that money to invest in the foreign exchange market. Because of leverage, clients without a huge amount of capital are able to make large investments, whereas in other markets such as the equities market, clients would have to pay 50% of the full amount for each share of stock they were investing in. Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to Ask a “lot” worth $100,000, with 100:1 leverage the trader only has to put up $1,000.

Leverage is about risk. Increasing your leverage increases both your opportunity to take bigger profits AND rack up bigger losses.

It’s easy to see in this graph that the amount of margin required in taking positions in the currencies market is much less than in the equities and futures markets.

What is margin?

Margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value.In the event that funds in the account fall below margin requirements, your broker will close some or all open positions. This prevents clients’ accounts from falling into a negative balance, even in a highly volatile, fast moving market.

For example, let’s say you have an account with $10,000. That means you have $10,000 of usable margin. If you use $7,000 to Ask 7 lots of USD/JPY, you now have $3,000 of usable margin left, meaning that you are allowed to lose $3,000 before you are under the margin requirement. The account equity remains at $10,000 until you begin to make or lose money on the position. Now, if the USD/JPY decreases to the point that you end up losing the $3,000 which is left in your account, then the broker will close all of your positions to ensure that you do not lose more than you have in your account.

How are leverage and margin related?

Leverage and margin are related in the way mentioned above – the amount of leverage a market maker gives to a client defines the amount of margin that the client will have to commit in order to take a position in the market. For example, when leverage is 100:1, the “1”

in the leverage ratio signifies the amount of capital the customer has invested of his own money, which is also known as the margin.