“leverage” is having the ability to control a large amount of money using none or very little of your own money and borrowing the rest.
For example, to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1.
You’re now controlling $100,000 with $1,000.
This is also called 1:1 leverage.
What is margin?
Margin is the amount of money needed as a “good faith deposit” to open a position with your broker.
Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, .5% or .25% margin.
In forex, to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000.
If your broker requires a 2% margin, you have a leverage of 50:1.
Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.
![](https://www.forextrade1.com/blog/wp-content/uploads/2023/01/image-32-1024x576.png)
IMPORTANT NOTES
- Leverage, which is the use of borrowed money to invest, is very common in forex trading.
- By borrowing money from a broker, investors can trade larger positions in a currency.
- However, leverage is a double-edged sword, meaning it can also magnify losses.
- Many brokers require a percentage of a trade to be held in cash as collateral, and that requirement can be higher for certain currencies.
Forex leverage calculator
A forex leverage calculator helps traders determine how much capital they need to open a new position, as well as manage their trades. It also helps them to avoid margin calls by determining the optimal position size.
The formula for forex leverage is:
L = A / E
where L is leverage, E is the margin amount (equity) and A is the asset amount.
You can also start with the margin amount and apply a leverage ratio to determine the position size. In this instance, the formula would be A = E.L. Therefore, multiplying the margin amount by the leverage ratio will give the asset size of a trader’s position.
The initial margin required by each broker can vary, depending on the size of the trade. If an investor buys $100,000 worth of EUR/USD, they might be required to hold $1,000 in the account as margin. In other words, the margin requirement would be 1% or ($1,000 / $100,000).
Summary
While margin is the deposit amount required to open a trade, leverage is capital borrowed from the broker in order to gain exposure to larger trading positions. Therefore, forex trading on margin enables traders to open larger positions with relatively small deposits. It is important to remember that trading on leverage can be risky as losses, as well as profits, are amplified.
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