Ever wished you could trade with more money than you actually have? In forex, you can-thanks to leverage! It’s like a financial superpower, giving you more market exposure with a smaller investment. But as with any superpower, it comes with responsibility. While leverage can boost your potential profits, it can also magnify your risks.

Let’s break it down.

Leverage: Your trading amplifier

Think of leverage like a magnifying glass-it enlarges your market exposure. With a small upfront deposit (your "margin"), you can control a much larger trading position.

Let’s say you have $100 to trade. With a leverage of 1:100, you can control $10,000 worth of currency. It’s like lifting 10 times your weight! Sounds great, right? But if the market moves against you, losses can add up just as fast.

A quick example:

Imagine you want to buy 10 shares of a stock at $160 each. That’s a $1,600 trade.

With 1:10 leverage: You only need to invest $160 of your own money.
‍
If the price rises by $40: You still make a $400 profit.
‍
If the price drops by $20: You lose $200, which could be a big chunk of your initial investment with leverage.

Margin: Your security deposit

To use leverage, you must put down a deposit called margin. This acts as a safety net for the broker, ensuring you can cover potential losses.

Types of margin:

Used margin: The amount currently locked in your open trades.
‍
Free margin: The remaining balance available for new trades.

‍

Margin call: The warning signal

If your losses mount and your margin level drops too low, your broker might issue a margin call-a warning to add more funds or risk having your trades closed automatically. To stay on top of things, use online margin calculators to gauge your risk.

‍

The takeaway: Handle leverage with care

Leverage can be a game-changer-but it’s not a free ride. Think of it like driving a sports car: thrilling and powerful, but requiring skill and caution.

Start small and increase your exposure gradually.
‍
Never risk more than you can afford to lose.
‍
Use stop-loss orders to protect your capital.

Before jumping in, learn the ropes with our free forex courses on Deriv Academy or practice with a demo account. Once you’ve mastered leverage, you can use it wisely to maximize your trading potential!

Quiz

What happens if your margin level drops too low?





You get a bigger trading position.





Your broker issues a margin call.





Your profits automatically increase.





FAQs

What is the best leverage for beginners?



A lower leverage ratio, like 1:10 or 1:20, is safer for beginners. It reduces risk while still allowing you to trade effectively.

Can I trade forex without using leverage?



Yes! You can trade without leverage, but it means your potential profits (and losses) will be smaller since you're only trading with your actual capital.

How do I avoid a margin call?



Monitor your trades, use stop-loss orders, and avoid overleveraging. A solid risk management strategy will help you stay in control.

Contents