Leverage

Earlier, we discussed margin trading - trading with borrowed capital. Margin trading increases buying power, allowing you to trade large amounts with little initial capital.

Small traders can trade large amounts of money by using the leverage offered by their broker.

Leverage means using something small to control something large. In forex, using leverage gives traders the ability to make large trades with a small amount of money.

Some brokers offer a 1% margin. This equates to a 1:100 leverage. This means you can control 100 times your deposit with the broker. For example, US$5,000 deposit entitles you to trade up to US$500,000. US$10,000 deposit entitles you to trade up to US$1,000,000. And so on .

A 2% margin equates to a 1:50 leverage, letting you control 50 times your deposit.

The maximum amount you're able to trade is, in effect, the amount your broker is willing to loan you to trade currencies. The money you deposit with your broker is a guarantee or trust deposit, providing protection from losses during a trade.