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How does leveraging your currency trades differ from leveraging your stock trades?

For starters, you don’t have to pay margin interest to hold a leveraged position like you do in stocks. You’re allowed to control a currency pair as long as you put down a “good faith deposit.” Note: if you place a sell order on a currency you will pay interest for that position each day, however on the flipside if you buy a currency you will be paid interest each day.

So if you’re trading currencies with a mini-account, you’d put down as little as US$25 or as much as US$200 deposit to control each mini-lot, this is because different brokers allow different amounts to control the exact same position.

Let’s suppose I had US$3,000 dollars in my currency trading account. If I open up one mini-lot, then my broker sets aside US$100 out of my account as a good faith deposit. That gives me the “right” to control that position. It’s much like your banker letting you control your house even though you haven’t paid for all of it yet.

It works in a similar fashion in Forex trading. My US$100 controls one mini-lot (or 10,000 units of currency). Then when I close out that lot, the US$100 is freed up and back in my “usable margin.”

Your usable margin is what you have left in your account once your broker takes the “good faith deposits” out of the equation. Then if the trade goes against you, your usable margin starts going down. If your usable margin goes to zero, then you experience a margin call. That means your firm closes out your position from their side.

Some brokerage firms work to ensure that your trading account doesn’t post negative balance. When you’re choosing a broker, make sure you ask if your potential broker provides this service. Otherwise, you could end up losing a bit more than what you had in your account.

However, at some firms if you’ve got US$3,000 in your account, then that’s the most you can lose.

That’s incredible if you compare it to trading margined stocks or commodities. In stocks, you can lose far more than you put in if you’re on margin. The same goes for trading commodities. Yet you get higher leverage in Forex than you do in either stocks or commodities. So be sure to ask your broker what their policy is on how they handle margin calls and debit balances.

To sum up: Leverage means you put down a little to control a lot essentially. So when you’re putting down US$100 to control one lot, you’re controlling 10,000 units of currency. So in this instance, you’ve got 100:1 leverage because your initial good faith deposit is 100 times smaller than the amount you’re investing.

Leverage is a double-edged sword. It magnifies both gains and losses. That means leverage allows you to either turn a small investment into large returns, or lose a lot faster.

Just like in stocks, you can shoot for the higher returns in the currency markets by leveraging your currency trades. That’s how the professionals manage to make the double or triple-digit gains or losses.