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Leverage in Forex is the ratio of the trader's funds to the size of the broker's credit. In other words, leverage is a borrowed capital to increase the potential returns.

Leverage can be calculated using the following formula:

Leverage = 1/Margin = 100/Margin requirement

For Example, if the margin is 0.02, then the margin requirement is 2%, and the leverage = 1/0.02 = 100/2 = 50.

1. Leverage makes trade easier

Leverage is usually given in a fixed amount that can vary with different brokers. Each broker gives out leverage based on their rules and regulations. The amounts are typically 50:1, 100:1, and 200:1.

·50:1: Fifty-to-one leverage means that for every $1 you have in your account, you can place a trade worth up to $50.

·100:1: One-hundred-to-one leverage means that for every $1 you have in your account, you can place a trade worth up to $100.

·200:1: Two-hundred-to-one leverage means that for every $1 you have in your account, you can place a trade worth up to $200.

As we can see, the apparent advantage of leverage is that it can greatly increase your trading ability, therefore, you are able to multiply your revenues by a whole lot.

Leverage also makes a rather boring market incredibly exciting. Without leverage, you would be surprised to see a 10% move in your account in one year. However, using leverage you can easily see a 10% move in one day.

2. Margin-based leverage and real leverage

①. Margin-based Leverage

Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up—and control—a huge amount of money.

To calculate margin-based leverage, divide the total transaction value by the amount of margin you are required to put up:

Margin-Based Leverage = Total Value of Transaction / Margin Required

②. Real Leverage

Investor can always attribute more than the required margin for any position. This indicates that the real leverage, not margin-based leverage, is the stronger indicator of profit and loss.

To calculate the real leverage you are currently using, simply divide the total face value of your open positions by your trading capital:

Real Leverage = Total Value of Transaction / Total Trading Capital

This also means that the margin-based leverage is equal to the maximum real leverage a trader can use. Since most traders do not use their entire accounts as margin for each of their trades, their real leverage tends to differ from their margin-based leverage.

③. Leverage can backfire

Although the ability to earn significant profits by using leverage is substantial, leverage can also work against you.

For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses.

That’s how leverage can backfire, it has the potential to enlarge your profits and losses by the same magnitude. Leverage is a double-edged sword. This is also why beginners are advised to stay away from high leverage trades.

On the other side, professional traders also usually trade with very low leverage.

Many professionals will use leverage amounts like 10:1 or 20:1.

No matter what your style, remember that just because the leverage is there does not mean you have to use it. In general, it takes the experience to really know when to use leverage and when not to. Staying cautious will keep you in the game for the long run.