Leverage & Margin

The Use Of Leverage & Margin

One of the main appealing factors about forex trading is the use of Leverage & Margin. It allows you to use a small amount of capital to open and maintain a much larger position. For example, if you want to open a trade of $100,000 worth of EURUSD, you don’t have to have that $100,000 dollars in your account.
What Is Leverage?
Technically, leverage is where a trader has a large sum at their disposal while using significantly smaller amount of their own funds. They effectively borrow the rest from their broker.

For example, If you’re trading with 1:100 leverage, and you have $1,000 in your account, you’ve got $100,000 available for trading. Although this sounds like an insanely good opportunity, you must always remember that it’s double-edged sword.

When you trade with a larger amount, as leverage enables you to do, you can open bigger positions and potentially earn larger profits. However, with bigger positions you also have a higher risk whereby your losses could also be large.
What Is Margin?
Margin trading is a method of trading assets using funds provided by a third party. When compared to regular trading accounts, margin accounts allow traders to access greater sums of capital, allowing them to leverage their positions.

Essentially, margin trading amplifies trading results so that traders are able to realize larger profits on successful trades. This ability to expand trading results makes margin trading especially popular in low-volatility markets, particularly the international Forex market.

In traditional markets, the borrowed funds are usually provided by an investment broker. In cryptocurrency trading, however, funds are often provided by other traders, who earn interest based on market demand for margin funds.