This article is for educational purposes only. Trading with leverage, margin, futures, or derivatives carries a high risk of rapid or total loss. This is not financial advice and should not be used to make trading decisions.
What Is Leverage in Forex Trading?
In this complete forex leverage guide, we break down how margin and borrowed exposure work for traders who already understand basic spot FX trading.
You will learn how leverage actually works in FX, how it changes your position sizing and risk, and what the main advantages and dangers are when you use it in live markets.
A multiplier in forex trading lets traders control larger positions than their cash balance alone would allow. This is done by borrowing exposure from the broker, which increases both the size of potential profits and the size of potential losses on every move.
Without leverage, price moves in major FX pairs often translate into small dollar changes on a retail account, which is why many traders are tempted to add borrowed exposure once they have a clear strategy and risk plan.
Forex leverage explained
When it comes to forex trading, credit is a key concept. It simply refers to the ability to trade larger amounts of money than you have in your account. For example, if you have $1,000 in your account and you’re using a 50:1 ratio, you can trade up to $50,000.
You could say that leverage is a multiplier of your account balance where your capital often is referred to as margin collateral.
Forex trades with multipliers are very similar to a bank loan for a car or a house where you as the borrower put down the upfront payment to access the borrowed money.
Forex works the same way, to open a leveraged position, you first need to make an initial investment and use this capital as margin.
Key takeaway
- Margin = Your own capital (also referred to as the collateral money)
- Leverage = The borrowed money you receive from your broker
Leverage is a tool that can amplify returns when you are on the right side of a move, but in practice it is more often a source of large, sudden losses for traders who misuse it.
Because of that, leverage should only be used with a clear risk management, predefined stop levels, and position sizes that assume you can lose the full margin at risk without blowing up your overall capital.
How does leverage work in the forex market?
So, how does leverage in forex trading work, and is it the same as in other asset classes?
As mentioned above, there are two parts to a successful forex position and the margin capital.
When you open a position, your broker will provide you with some of the capital needed to place the trade. The amount of credit available varies from broker to broker but is typically from 1:2 up to 1:2000 for major currencies.
If the trade goes in your favor and the currency pair you are trading rises in value, then your profits will be magnified by the amount of credit you are using.
For example, if you use 1:50 leverage, this means that for every $1 you have in your account, you can trade up to $50 worth of currency. If the currency pair rises by 1%, then a 50:1 position will see profits of 50%.
An initial deposit of $200 with a ratio of 1:50 would mean that you could open a forex position worth $10.000.
Keep in mind though, that if the currency pair falls you will suffer losses that are multiplied by the ratio you use.
See our full guide for a more complete breakdown of how leverage in trading works.
How do you trade forex with borrowed money
Many traders who use leverage in forex do so with short term approaches like scalping or intraday trading, where small price swings can have a big impact on P&L when positions are geared. The same small moves can wipe out margin just as quickly if the trade is wrong or poorly sized.
Before you pick a broker, it is important to be honest about your typical position size, drawdown tolerance, and margin needs, then choose an account type that fits those constraints. Even small changes in lot size can have a big impact on risk when leverage is involved.
The actual trading is done through the charting interface, or the trading platform, which can differ from broker to broker.
Many forex brokers offer the traditional MetaTrader 4 and MetaTrader 5 which have all the necessities a trader needs when it comes to charting functionality, order types, and of course the number of markets.
Other operators have integrated web-based trading platforms that let you trade in your browser which is also a great option if you don’t want to go through the hassle of downloading the MT4 or MT5 programs.
Most brokers offer demo trade accounts where you can practice trading without risking any of your own money.
3 examples to give you the full picture
To give you, the reader, a better perception of how it could feel to trade a live forex account I will give try to explain in different ways profits and losses occur in different trades based on different sizes and ratios.
Let’s take a look at some examples that could happen in the forex market.
Example 1
You have a $1,000 trading account and you want to use credit to trade EUR/USD.
With a 1:100 ratio, you could trade up to $100,000 worth of currency. This means that for every $1 that the EUR/USD moves, your account will move $100.
If the EUR/USD moves from 1.20 to 1.21, your account will increase by $100. If the EUR/USD moves from 1.20 to 1.19, your account will decrease by $100.
Example 2
If you have $1,000 in your margin account and you want to purchase $10,000 worth of USD/JPY, you can do so by borrowing $9,000 from your broker at a ratio of 1:10.
If the trade goes in your favor and the currency you purchased increases in value by 10 percent, the position would show a $1,000 profit, which is a 100% return on the original $1,000 margin.
If the same move happens against you, that 10% drop would be enough to wipe out the entire margin and trigger a full liquidation. This is the asymmetry traders often underestimate when they focus only on the upside.
Example 3
Let’s say that you have $2,000 to invest in GBP/CAD. With a ratio of 1:100, you could control $200,000 worth of currency.
So, if GBP/CAD increases in value by 0.50%, your profit would be worth $1,000.
Now let’s say that GBP/CAD decreases in value by -0.50%. In this case, your initial investment of $2,000 would lose value and be worth $1,000.
As you can see, leverage can wipe out an account in a very short time when the market moves against you. The same multiplier that creates that risk is what allows the P&L to grow quickly when you are on the right side, but the downside always needs to be planned for first.
Let’s simplify one of the more complicated terms in the forex world.
It might seem complicated but once you understand the one function they have you will never have to ask yourself this question again.
Think of the ratio as a multiplier of your account balance. Let’s say that your initial deposit is $500 and you are trading with a ratio of 1:10, then you would be able to control a position size worth $5000.
The calculation is simple: $500 x 10 = $5000
That’s the easiest way to explain how ratios work, and they work the same for any level of leverage you choose. For example, if your account balance is $1200 and you use a ratio of 1:75 you simply multiply $1200 by 75 to figure out the buying power.
$1200 x 75 = $90.000
Now, the ratio is the amount of borrowed money you will receive from your broker once you open a trade. But there is another part to a full forex position which is your capital, or the collateral money.
Let’s take the image above as an example. The red part of the circle represents 25% of the whole circle. Let’s say that this is your part of a forex position.
If you put up 25% of the total position, you are trading with a ratio of 1:4, because 25% times 4 equals 100%.
It doesn’t matter how much the full value of the trade is, as long as you know your part of the transaction and the part that the broker is providing.
Once you understand the split between your own capital (margin) and the borrowed exposure, it becomes easier to calculate the size of a leveraged FX position. That does not make it less risky, but it does make your decision making more deliberate.
All the common risks
There are a handful of risks that you should be aware of as a trader in the forex markets, especially when you are adding credit to the mix. Below are some of the most important risk factors to take into consideration before you start.
- Magnified losses – Most traders focus on the idea that leverage can increase profits. What really matters is how much faster your account can go to zero when a position moves against you and you are oversized for the volatility. Beginners often make the mistake of only looking forward without having their backs covered and this can cost them dearly. You can lose more money than invested with leverage.
- Increased fees – The next risk I wanted to list was the increase in trade commissions. If you are a stock trader or perhaps come from cryptocurrency trading and are used to having a standard 0.20% flat fee you are going to be surprised how quickly the fees can ramp up, especially if you trade an exotic forex pair with wide spreads. Large spreads with high levels can cause your trading account to bleed out pretty fast. Make sure you understand exactly how the fee schedule works and only trade when you find a broker with decent fees.
- Shady brokers – The forex business in general has had a bad reputation due to many shady actors that are trying to make a quick buck by manipulating prices, adding fees, and stopping withdrawals from clients. This is no longer a problem, thank god, but if you choose to trade on an off-shore forex broker to find higher ratios you might end up signing up with a true scammer. Most of the off-short brokers are unregulated and the truth is that most of them cannot be trusted. Instead, choose one of the brokers we recommended earlier in this guide to stay on the safe side.
- Margin call – A margin call is a warning from your broker that your losses have eaten up most of your margin capital and you are getting close to a full liquidation. At this point, you can still save what’s left in your account by closing out your open positions and taking the loss before it gets worse. Leveraged accounts regularly get margin called due to inexperience by the trader that overleverage in search for profits. My tip for trading is to start small and increase as you learn.
- Liquidation – Getting liquidated is truly a worst-case scenario for any forex trader, big or small. When you suffer a full liquidation it means that your margin capital has run out and you can no longer withstand the open losses in your account. Liquidation is an automatic termination of all open positions done by your broker to avoid falling into debt with the broker. To avoid liquidation learn how to figure your liquidation price and use a stop-loss for every trade.
Related: Is leverage trading legal in the US?
Margin call explained
If your margin requirements fall below the threshold, you’ll receive a margin call from your broker. The warning sign is usually in the form of an online message in your trading terminal but in some cases, they might give you a phone call.
Here’s a quick rundown of what you need to know about margin calls.
- A margin call happens when you don’t have enough margin capital in your account to cover the overall losses
- A team member of your broker will usually try to reach you before taking any action
- If they can’t reach you, they may close out some or all of your positions at whatever price they can get
- The best way to avoid a margin call is to always make sure you have enough money in your account to cover your margin requirements
- A stop loss will also prevent a margin call from happening
Our stop loss calculator is a tool you can use to set your perfect stop loss in any market.
If you see this warning sign on your platform or if you receive a phone call, you have three options.
- Deposit more money into your account to meet the margin requirements
- Close out some of your open positions to increase your margin
- If you only have one big position open you might need to close it out and take a big hit
If you don’t take either of these actions, your broker will likely do it for you. Every situation is different and many factors are in play when you get margin called. The decision is ultimately up to you and whatever you decide to do you should know that the worst thing you could possibly do is to ignore the margin call and hope things turn around, they usually don’t.
Conclusion
In this guide we have broken down the core mechanics of leverage in forex trading and the main risks that serious traders need to understand before using it.
The FX market can feel like a jungle when you first look at margin, ratios, and liquidation levels. Over time it becomes more readable, but that does not make it safer. The instruments stay the same. Only your discipline changes.
If you already have experience trading spot FX and you are considering using leverage, re read the risk sections of this guide and stress test your plan on a demo account first. When you eventually choose a live broker, prioritize regulation, execution quality, and transparent fee structures over the highest leverage on offer.
Anton Palovaara
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.
