Leverage is a key part of forex trading due to large position sizes and small market daily movements. Take a look at our guide to leverage in forex, including how to calculate your risk.
What is leverage in forex?
For example, if your broker had 100:1 FX leverage, you’d only have to put down $1,000 to gain exposure worth $100,000.
You can see why this is appealing to most FX traders. In fact, the large position sizes inherent to currency trading – a single standard lot is worth 100,000 units of a currency – make using leverage necessary for most retail traders.
However, using leverage is very much a double-edged sword. While your profits are based on the full value of the trade, and not just the deposit amount, so are your losses. This opens traders up to the possibility of increased risk.
Forex trading offers some of the lowest margin rates of any financial market, which means it has greater capital risk. This is especially true given how volatile FX market prices are. That’s why having an effective risk management strategy in place is essential for using leverage in forex.
Different leverage in forex
There are a range of different leverage ratios in forex, and you’ll see brokers offering pretty extreme variances in rates between countries. Plus, leverage can vary from currency pair to currency pair. A broker may require higher margin requirements on the more volatile pairs as collateral against the greater risk.
The rates are shown as leverage ratios, which tell a trader how much the trade size is magnified as a result of the margin held by the broker. For example, a ratio of 100:1 would mean that for every $1,000 in your account, you can trade up to $100,000 in value.
Although 100:1 leverage seems extremely risky, especially compared to the low margin rates of other markets, it’s important to consider that currency prices often move by less than 1% during a session.
But for retail markets, it’s more common to find brokers offering 1:30 or 1:50 leverage forex rates to retail traders. The industry standard is around 3.3% for the most traded currency pairs, such as EUR/USD, USD/JPY and GBP/USD.
Largely this is because, there are limits to the leverage brokers can offer clients. For example, in the UK, the limits are between 30:1 and 2:1 depending on the volatility of the underlying asset.
Forex leverage calculator
A forex leverage calculator is a tool that enables traders to determine how much money they’ll need to open a new position. Alternatively, you could calculate the leverage on your position yourself. The formula for forex leverage is:
Leverage = position size/margin
For example, if you have £10,000 in your account, and you open a £100,000 position (one standard lot), you will be trading with 10x leverage (100,000/10,000).
Some leverage calculators can also work out your profit or loss per pip on each trade you make, so it’s possible to determine the potential risk to your capital.
Take a look at the City Index forex leverage calculator
City Index forex leverage
City Index offers margin rates as low as 3.3%, which is a leverage ratio of 30:1. This means you can open a position worth up to 30 times more than the deposit required to open the trade.
Before you trade with City Index, it’s important to understand the risks of leverage.
Risks of using leverage in forex trading
The benefits of forex leverage are the increased position sizes, but there are also risks that are vital to understand and know how to manage, some of which are described below.
- Magnified loss – your initial outlay may be smaller but you’re still putting a much larger sum at risk. Although retail traders can’t lose more than the balance in the account, you could end up losing more than the initial margin, which is why it’s always important to consider your trade as a whole, and never risk more than you can afford to lose
- Margin call – if your losses start to increase, you could get placed on margin call. This means you need to either close out your position yourself, reduce the size of your trade or add additional funds to your account to cover any losses. We’ll notify you via email if this happens. But, if you leave your position open and it drops to below 50% of the margin requirement, we'll close it automatically. During times of high volatility market prices can also ‘gap’ or ‘slippage’ may occur, and this may affect the prices at which your positions are closed out
- Funding charges – as you’re borrowing money from your provider, you’ll usually be charged a fee to cover the costs involved
Find out more about the risks of trading
Can I trade forex without leverage?
It is possible to trade forex without leverage, but it’s not widely accessible to retail traders due to the large amount of capital required upfront (minimum $100,000) and the small returns generated from it.
Currency pairs rarely change by more than 1 to 2%, meaning that if you do not use leverage, any profits or losses will be a very small percentage. So, to get any potential return, individuals who trade forex without leverage will need to invest large amounts of money.
What is a beginner leverage in forex?
A common beginner leverage in forex is lower ratios, such as 1:5 or 1:10, before starting to look at higher ratios such as 1:30 and more.
But ultimately, the most important thing is to always have an understanding of how much you’re actually risking on each trade. This means knowing your full trade value not and just the initial margin requirement. You can do this using a forex leverage calculator.