Leverage Definition. Leverage, commonly referred to as margin, is the ratio of the amount used in a transaction to the required security deposit. A broker will advance these funds depending upon the amount of the initial margin and maintenance deposit on hand and his appraisal of his risk of loss in the transaction. A forex trader utilizes leverage to increase the potential for a higher return on his invested capital. However, he also increases the potential for loss at the same time if he uses these borrowed funds unwisely. Leverage can magnify both gains and losses. You can also acquire leverage or control over a specific currency without borrowing through the use of options. Since leverage does involve increased risk, a forex trader should be extra cautious when using it. He should also be skeptical of brokers that promote the usage of enormous amounts of leverage. The potential for fraud exists with these brokers since price/spread manipulation can be easily disguised and used by an unscrupulous broker to steal the funds in your accounts.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.