When it comes to Forex and CFD trading, leverage is one of the most important concepts for new traders to understand. If you are a beginner trader and are looking for an answer to the question 'what is leverage in trading?' - you have come to the right place.

In this article, we will closely examine what Forex trading leverage is, how it works, its advantages and disadvantages and much more.

What Is Leverage in Trading?

Leverage involves using borrowed capital in order to facilitate an investment, resulting in the potential returns being magnified.

Forex and CFD leverage allows both retail and professional traders to access larger position sizes with a smaller initial deposit. Essentially, traders are borrowing money from their broker in order to increase their buying power when placing trades.

Once a leveraged trading position is closed, the money borrowed is returned to the broker and the trader either receives the profit or is liable for the loss.

In order to access and maintain a leveraged position, the trader is required to put down a fraction of their trade’s value as a deposit. This deposit is known as the margin.

Trading leverage is usually expressed as a ratio, which demonstrates how large a position you can open compared to the margin.

For example, a trading account with leverage of 1:30 means that a trader can open a position 30 times the size of their margin. The knock-on effect of this will be that any profit or losses will also be subject to the same multiplication of 30.