What is Leverage in Forex Trading?

You will need to know these forex glossary terms for this set:

• Minimum Security Margin is the required minimum account balance your account must maintain. It is represented by a percentage of the lot of currency you will trade FOREX online with.
• Usable Margin is available money that you have to open new trades/positions or sustain losses from trades.
• Used Margin is money that is on the line for the lot(s) you are trading with. Used margin does NOT count for Usable Margin that can sustain losses.

When you trade FOREX online, your brokers is, in essence, loaning you hundreds of thousands of dollars to trade FOREX online with. What your broker will require of you, the trader, is a fractional good-faith deposit made by you, the trader. Most brokers require a minimum account balance of, for example, $1000. This balance is like collateral for the money that you are borrowing from your broker to trade with. Don’t be mistaken, though, you can lose all of this money, should you make the wrong FOREX trade.

In this example, let’s say your broker requires a minimum deposit of 1% of the amount you will be trading with, or “borrowing.” This rate is referred to as the minimum security margin. So, if you deposit the $1000, you will have access to a $100,000 lot to trade with. If your account holds $2000 in it, you will have access to $200,000 to trade FOREX online with, and so on. Each broker’s minimum security margin requirement is different.

NOTE: Make sure you are aware of the broker’s minimum security margin before you create a real-money account with them

In order to prevent your account from going into the negative bracket, due to the highly volatile FOREX market, brokers will close some or all open trades, if your account balance falls below the required usable margin; to avoid this from occurring, deposit more money into your account if it begins to get low. This action prevents you from losing more than you have deposited and minimizes the broker’s risk as well.

NOTE: Brokers have strict policies regarding margin trading. Make sure you are aware of and familiar with all of the policies your broker operates under.

You should also be aware that the usable margin percentage often increases over the weekend, so if you plan on holding your position throughout the weekend, you must be aware of possible shifts in usable margin requirements, so that your account will maintain the balance needed to support your currency holdings. Should it not, then you may be subject to an automatic close out of some or all of your trades by your broker at the close of business on Friday afternoon, which is usually 5:00 pm EST for US brokers.

Some traders believe that too much margin can be dangerous for some individuals. As long as you are familiar with the policies of the broker and aware of the risks, you can handle it.