Truth About Forex Leverage and Margin

Retail forex is about $ 313 billion in daily operations or about 8% of the total daily turnover of the entire foreign exchange market. Due to the high leverage and margins gained by forex retailers from the trading system used by all retail trade brokers, market observers and critics are often surprised at how the forex market is able to maintain its efficiency and ensure the fulfillment of all trading obligations.

Retail forex brokers can ensure that trade obligations are always met with the help of two simple rules of trade that they impose. The first rule is to ensure that every transaction made is covered by a sufficient security margin, which should be at least equivalent to the required margin deposit for one forex lot. For standard forex lot which usually implies purchase of 100,000 units of currency, a minimum margin requirement would be $2000 which would therefore translate into 50:1 leverage. Some brokers however have restrictions in place – for example CFTC regulated brokers should limit leverage offerings to a maximum of 50:1. This is done to ensure the safety of client’s deposits. Micro and mini accounts with smaller lots sizes have smaller minimum deposit requirements, but leverage should still be limited to a maximum of 50:1

Foreign brokers not abiding by US regulatory standards  can offer substantially higher  leverage ranging from as low as f 100: 1 to a maximum of 400:1. In case of the latter, having only $1000 on your forex trading account would be enough to execute a trading order in the size of 4 standard lots and make significant profits even on minor price  volatility.

Other brokers rules impose limits on the maximum losses that traders can incur for each open position. The maximum possible loss accumulated on trader’s floating PNL per each position is usually set to 25% of the initial margin deposit per lot. This represents the price level when any outstanding position or open trade will be automatically closed or liquidated, since at that time the unprocessed part of their capital (or margin deposit) is only 25% of the required margin. However, rules vary substantially across various regulatory jurisdictions.

These two rules regarding leverage and margin requirements are included in all trading platforms that every online forex trading broker provides to its customers for use in its trading activities. Trade can not be executed using these platforms if the account does not have sufficient deposit in accordance with the active margin requirements. This also means that all open positions will be automatically   terminated on reaching the “margin call”.

Theoretically, leverage is achieved through the use of borrowed capital, and to a large extent it is believed that retail forex brokers provide capital to their clients in order to be able to increase their exposure and flexibility on the market. Truth is, borrowed capital, or lending – only for books. The reality is that actual trading, as can be gleaned from the above explanations, is dependent on the margin deposit the trader has on his trading account. That leverage does is essentially levering the margin requirements, allowing trader to control much higher deposits while having very small percentage of the real margin on his balance. As such, reckless trading on highly leveraged accounts may cause heavy losses much in the same was as it may be helpful in making fast profits. It is a blessing and a curse in the equal measure