What is leverage and margin trading?

At iFOREX you have the opportunity to trade CFDs with leverage, which is a powerful tool, but one that needs to be properly understood – and properly used. What do we mean? Let’s start with a couple of basic concepts.

What is leverage trading?

Leverage trading enables you to open large deals with a relatively small investment, thus maximizing your trading power, but also your risk. Why? Because when you use high leverage, both successful and unsuccessful deals are, in simple terms, amplified.

Here’s an example: Let’s say you invest $100 in a popular currency pair: EUR/USD. With a maximum leverage of 400:1, you can open a deal that is worth 400 times your initial investment, which is $40,000.

Understanding margin

Now that we understand leverage, let’s look at the other side of the equation: margin, meaning the funds you need to have in your account in order to open a specific deal. Margin both enables you to open large deals with a small investment and acts as collateral to cover any potential losses. In the previous example, we can reverse the same statement: in order to open a $40,000 deal, you need a 0.25% margin, which is $100.

Different brokers require different margins for different instruments – depending on volatility, as well as other factors. Here is a simple chart that offers some popular examples for required margins - and what it means in terms of maximum leverage.

For the full list of our instruments, available maximum leverage and margin requirements visit our trading conditions page.

Leverage Trading

Leverage trading is a powerful tool that can amplify your trades into the stratosphere. With a 1:200 leverage, for example, you require only 1/200 of the investment to reap the reward from it. Although, it also amplifies losses, so it's important to ensure you have enough funds for those rainy days. Furthermore, you may want to use features like Take Profit and Stop Loss to minimize the risk, especially when leveraging because of how it is amplified.

However, leveraging is an important tool in your trader toolbox because it lets you make trades you couldn't normally achieve. To have more intuitive trades, it's important to stay updated on economic news to know which instrument to pick, how to trade, and what level of leverage you're comfortable with. This can take practice for beginners, so be sure to use that demo account to its fullest to grasp trading well.