The amount of leverage available often depends on how volatile or liquid a market is. Less stable and less traded markets typically offer lower leverage. This helps protect your positions from sudden price changes. On the other hand, markets with high liquidity and lower volatility can offer much higher leverage ratios.
Forex trading is known for having some of the highest leverage ratios in finance. The difference in leverage between forex and shares, for example, is quite significant. In the stock market, leverage usually starts at 5:1. In contrast, leverage in the forex market can go up to 30:1 for the most commonly traded currency pairs.
Leverage will either amplify your returns or increase your losses, depending on the outcome of a trade. That’s why it’s important that you understand how leverage works and manage your risk diligently.
Leverage and margin explained
Leverage and margin are closely related concepts in trading. The terms are sometimes used interchangeably, but it's important to remember that they’re not one and the same. Leverage is the mechanism that magnifies your profits and losses, while margin is the specific amount of money you must have to open a position with amplified exposure.
- Leverage enables you to control a larger position size with a proportionally smaller amount of capital. As mentioned, it's usually expressed as a ratio, eg 20:1, which means you would have exposure to $20 in the market for every $1 of your position size
- Margin is the deposit you put down to open a leveraged position. It represents a fraction of your total trade size. So, you could lose more than your outlay if the market moves against you. Margin requirements are usually higher for currency pairs that are more volatile, ie where there’s an increased risk of large price fluctuations
