• Margin and leverage allows forex traders to control trading positions that are substantially greater in size than would be the case without the use of these tools.
• At the most fundamental level, the margin is the amount of money in a trader’s account that is required as a deposit in order to open and maintain a leveraged trading position.

What is a leveraged trading position?

Leverage simply allows traders to control larger positions with a smaller amount of actual trading funds. In the case of 50:1 leverage (or 2% margin required), for example, $1 in a trading account can control a position worth $50. As a result, leveraged trading can be a “double-edged sword” in that both potential profits as well as potential losses are magnified according to the degree of leverage used.

In leveraged forex trading, margin privileges are extended to traders in good faith as a way to facilitate more efficient trading of currencies. As such, it is essential that traders maintain at least the minimum margin requirements for all open positions at all times in order to avoid any unexpected liquidation of trading position

For example:  USD/CAD trade.

To buy or sell 100,000 of USD/CAD without leverage would require the trader to put up $100,000 in account funds which is the full value of the position.

But with 50:1 leverage (or 2% margin required), only $2,000 of the trader’s funds would be required to open and maintain that $100,000 USD/CAD position.

While a margin amount of only 1/50th of the actual trade size is required from the trader to open this trade, however, any profit or loss on the trade would correspond to the full $100,000 leveraged amount. In the case of USD/CAD at the current market price, this would be a profit or loss of around $10 per one-pip move in price. This illustrates the magnification of profit and loss when trading positions are leveraged with the use of margin.