
The forex leverage is among one of the highest in the financial market. In fact, leverage in forex trading is one of the key aspects that attract millions of traders worldwide. But if you’re new in the game, you might wonder exactly what is leverage in forex and, most importantly, how does forex leverage work? Find out!
What is Leverage?
The capital traders borrow for the short-term from their broker is called leverage in Forex trading. The objective of borrowing the capital is to trade larger positions in the market with a small fund of their own. For instance, with a deposit of $1,000 in your trading account, you can control a position of up to $50,000, which magnifies your profit potential.

What is Margin in Forex?
While leverage is a short-term loan provided by the broker to the trader, the margin in forex can be assumed as a security deposit. This is the amount your broker requires you to have in your trading account in cash to take advantage of the leverage. It is basically a small percentage of the entire position. For instance, for leverage of $100,000, your Forex broker may require you to have a margin of $1,000. The margin level depends on various factors and it varies from one forex broker to another.
The formula to calculate margin is simple:
Leverage = 1/margin = 100/margin percentage
Instead of calculating manually, you can also use an online margin calculator.
How Does Forex Leverage Work?
The leverage ratio indicates the relationship between leverage and margin. It shows the trade size increases with the size of the margin. Meaning, if a broker holds a certain amount as a margin, by how much the total trade size is magnified. As mentioned earlier, margin requirements vary from one broker to another.
Some of the common leverage ratio examples are 20:1, 50:1, 100:1, and 200:1.
- 20:1 means with the investment of $1000 you get the exposure of $20,000. The margin requirement is 5 percent.
- 50:1 means with the investment of $1000 you get the exposure of $50,000. The margin requirement is 2 percent.
- 100:1 means with the investment of $1000 you get the exposure of $100,000. The margin requirement is 1 percent.
- 200:1 means with the investment of $1000 you get the exposure of $200,000. The margin requirement is 0.50 percent.
As is evident, forex margin and forex leverage are inversely related. When there’s a lower margin level, the leverage provided is higher. And when there’s a higher margin level, the leverage provided is lower.
For example, say you want to open a position with the EUR/USD pair. You have $1000 in your trading account. Your Forex broker offers a leverage of 100:1. In leveraged trading, you can get an exposure of up to $100,000. Based on the pip value of the currency pair, you can enjoy the magnified gain or loss. This is the power of leverage.
Benefits of leverage
There are many benefits of leverage in forex trading. It significantly increases your profit potential. It increases capital efficiency. With low capital, you enjoy the opportunity to take large positions. You can also short the market, unlocking good returns even when the market is falling.
That said, though, in addition to the benefits, there are also a few disadvantages to leverage. For instance, it magnifies your losses. And there are also margin call risks. This is why it’s essential that traders have a well-defined strategy to manage leverage risks, like using stop-loss orders and starting with low leverage, especially if they are beginners.