Trading with leverage: Impact on your funds

What is Leverage? Basic Understanding You Need to Know

In the world of trading currencies, leverage refers to the facility provided by brokers that allows traders to control positions larger than their actual capital. For example, if you want to control a position of $100,000, the broker might deduct only $1,000 from your account. The remaining amount is borrowed from the broker, which is called (margin).

The relationship between leverage and margin is straightforward: the higher the leverage, the less margin required proportionally. Brokers often offer leverage ranging from 1:1 to 1:500, depending on each company’s policy.

Calculation Methods and Real Examples

Suppose you want to open a position with leverage of 1:100 or 1:200 while the EUR/USD trading value is 1.26837.

Scenario 1: Using 1:100

• If you trade 1 lot (100,000 units), the value is 100,000 × 1.26837 = $126,837.
• Margin required: $126,837 × 1% = $1,268.37.

Scenario 2: Using 1:200

• If you trade 1 lot (100,000 units), the value is 100,000 × 1.26837 = $126,837.
• Margin required: $126,837 × 0.5% = $634.19.

Impact on Profit and Loss

This is the critical part—leverage can significantly amplify percentage returns.

Suppose EUR/USD increases by 3 pips from 1.26837 to 1.26867. The dollar profit will be the same ($130) in both cases:

Similarly, if the price drops by 3 pips to 1.26807, the loss will show the same but in the opposite direction, meaning the $130 loss will become -20% of your used capital, not just -0.1%.

Summary: A Double-Edged Sword

Leverage is a powerful tool for traders, capable of magnifying profits exponentially. However, it can also amplify losses equally. Choosing the appropriate leverage depends on individual risk tolerance and experience. Brokers offer various leverage options for traders to select according to their preferences. A thorough understanding of leverage and margin is essential for effective risk management.