Leverage

Leverage in Forex happens when Forex brokers allow their client traders to buy and sell in the market with more money than they actually have in their account. Forex brokers offering leverage effectively loan money to their trading clients who want to be “leveraged”. Almost all Forex brokers offer leveraged trading, and the maximum leverage which can be offered by a Forex broker is limited by law and regulation in the country from which they are operating.

Leverage allows traders to control much more money in the Forex market than they actually own. 

An example of leverage in Forex: a trader deposits $100 with a Forex broker and opens a trade in the USD/JPY currency pair with a position size of 1 micro-lot (equal to 0.01 lots). As 1 lot of USD/JPY is worth $100,000 a micro-lot is worth $1,000. The trader has deposited $100 but controls $1,000, so the trader is leveraged at a rate of 10 to 1 – this is called the trader’s “true leverage”. The Forex broker allows the trader to do this because the broker allows a maximum rate of leverage on USD/JPY trades which is equal to or higher than 10 to 1. 

The use of leverage in Forex or any type of investment or speculation is possible because it is extremely unlikely that the value of an asset, especially a major currency, will collapse to zero very quickly. So, brokers will not fear allowing traders to control more money than they actually have, up to a limit. 

The maximum leverage regulators and brokers allow varies according to the anticipated volatility of what is being traded. For example, Bitcoin has a recent history of making very dramatic price movements, so many brokers apply a maximum leverage in Bitcoin of only 2 to 1, meaning traders must deposit at least half of the amount they want to control in the market. At the other extreme, the EUR/USD currency pair tends to fluctuate by approximately only 10% in value over a year, so the maximum leverage available there is usually 30 to 1 or even higher. Read more ...