Leverage in trading is defined as borrowing money from some other to invest in a financial instrument. Usually the money is burrowed from the broker. One of the main things which make
forex trading very attractive to traders is its high leverage; generally
forex brokers offer very high leverage compared to stock and futures brokers. Actually trading for the very small pip difference in currency pairs requires very high investments to make any significant profit or loss. The broker is providing you this leverage because most persons won’t have millions of dollars for doing such big currency transactions.
Generally forex trading leverage is
margin based. Margin in defined as the amount of money one need to put up in his account to trade a specific transaction value. The margin based leverage can vary considerably with FX brokers; from 400:1 to 50:1. The usual 100:1 margin means that you need to invest at least $1 for trading a $100 worth transaction. Remember the margin-based leverage can be different from
real leverage; and actually it is the greatest leverage limit a trader can enjoy in his account. The real leverage is the aggregate value of your total open positions divided by the total trading capital in your account. For example if you have $10,000 in your account and opening a position worth $100,000 then you are utilizing 10:1 leverage which will the one tenth of your allowable leverage of 100:1.
Many say '
leverage is a double-edged sward'. This is because it can magnify both the profit and loss. The extent of leverage a trader can utilize depends on many things like the liquidity of currency pair, his trading style and his money management.