Forex Trading: Leverage And Margin

Leverage trading, which is more commonly known as trading on margin, simply means that you don't have to put up the full amount or value of the trading position.

One of the main differences between forex trading and stock trading is that forex offers more leverage, which is up to 200 times according to the value of your account. This also means with more leverage there is an increase in risk as well.

Majority of online forex brokers allow margin trades at a leverage of 100:1 (1%). This would mean if the forex trader's opening position is $100,000, an investment of $1,000 would be required while the rest, $99,000, would be on borrowed capital. This type of leverage can maximize profit potential but at the same time there is potential for loss too. A forex trader newer to the FX markets would be wise to start with a leverage of 20:1.

In forex trading there are no debit balances, therefore no margin calls. Forex brokers usually allow risk only to the funds that are on deposit. Since there are no margin calls and for protection purposes, forex brokers will close out all positions automatically if the value of the position decreases significantly. This way you won't risk more money than is in your forex account.

Having leverage gives more opportunity for making money but at the same time there is more risk involved. You can downside this risk by limiting orders and placing stop-loss orders on all positions you have open.