What is Leverage?
Leveraged trading is one of the key advantages behind trading forex. Leverage, also referred to as margin, allows you to gain a large exposure to the forex markets for a relatively small initial deposit.
This means that should the markets move in your favour, your net returns could be much greater than your initial outlay, which would not be the case were you to buy the currency physically.
Leverage, however, is a double edged sword so whilst your net returns could be much greater than your initial deposit, so can your losses and here lies the main risk with leveraged trading.
How leverage works
Leverage essentially means controlling a large exposure for a small deposit which you select, ranging from 0.25% to 5%, using our ‘Leverage to Suit’ model.
Leverage is worked out as a ratio, for example 50:1 is a ratio equivalent of a margin of 2% (1/50 = 0.02 or 2%). In this example therefore, you would need to have at least 2% of the total exposure of your intended forex position in your account in order to place the trade.
The margin required for a position is the amount of funds you must have in your account in order to open and maintain a forex position.
Each night you will pay a small financing charge on the exposure of the forex trade including the amount that has been effectively borrowed in order to trade the full position. In this sense, leverage works in a very similar way to how one might buy a house on a mortgage.
Your trading account automatically calculates margin in real-time, based on the prices of the currency pair you trade. This means that the margin amount required is affected by changes in the market price, allowing you to gain a greater management and awareness over your margin requirement during your trades.
For currency pairs not of your base currency, the margin required will be converted back into your base currency at the prevailing market price for that pair.