We can sum up the meaning of leverage in Five words: “Doing more with less money.”
Not many retail traders are able to invest $100,000 or $10,000 to trade one standard or one mini lot.
This is where the Leverage and the forex broker steps in. Simply forex brokers provide retail traders with leverage so that they do not need to lay out $100,000 to trade one standard lot.
How can this work. Well if the broker provides you with leverage of 30:1, instead of laying out $100,000, all you need is $3333.33 to trade one standard lot. Sometimes this amount is referred to as margin. It is also the basis of how brokers refer to your trading account as a margin account.
Margin basically allows a trader to purchase a contract without the need to provide the full value of the contract. Example, $3333.33 is the margin required for you to trade $100,000 on a leverage of 30:1.
Using this formula:
Margin required = Lot size/Leverage
So, for the example:
Margin required = $100,000/30 = $3333.33
Margin percentage = $3333.33/$100,000 = 3.33%
Please note that, leveraged transactions can cause either a favorable or unfavorable result, in the value of the funds in client’s trading account. Considering that, trading CFDs is performed using leverage, this can have a multiplicative effect on both your losses and gains.