What Is Leverage?

Leverage gives the traders the ability to trade with more than they actually have. Say for example you have 500:1 leverage, that means that for every $1 USD, you actually have control of $500 USD in exposure to use and participate in the forex market with. Thus, you can greatly increase your profits, however, you can just as easily incur significant losses. 

What Is Margin?

Margin is the amount of funds you need to place a trade. The amount that you need in margin depends on the trade volume that you choose to open. You will have a margin regardless of what leverage you choose to have. For positions with higher leverage i.e., 500:1 you will only need a small percentage of funds to place a trade. Conversely, for positions with lower leverage i.e., 25:1 you will need a larger portion of funds to place a trade. 

Let’S Take A Look At An Example Using These Two Concepts:

Say, for instance, you have 500:1 leverage and you try placing a 1.0 standard lot (100,000 units of the base currency) of EURUSD in your USD trading account. You can determine how much you need in your account to place this trade using the following formula: 

lot size x current price / leverage = margin required 

In the example above, this will be the following: 

100,000 EUR x 1.101 EUR / USD500 = 220.2 USD margin required

Now let’s consider the same example with a lower leverage amount, for example 1:1 leverage. 

100,000 EUR x 1.101 EUR/USD / 1 = 110,100 USD margin required

As you can see from this example, you would need a lot of money to trade 1.0 standard lot of EUR/USD. Ultimately, the extent to whether you leverage is entirely your choice.