The Forex market offers the potential to trade on margin. The ability to trade on margin is one of the attractive – but at the same time risky- features of forex trading. Essentially trading on margin allows the forex trader to trade on borrowed funds. The degree to which the trader can borrow will depend on the broker they are using and the leverage or gearing they offer.
In the Forex market the term margin is the amount of money required to open a leveraged position, or a contract in the market.
Without leverage a trader placing a standard lot trade in the market would need to post the full contract value of $100,000 in order to have his or her trade executed. Leverage allows a trader to place the same $100,000 contract for an amount of margin (determined by the set level of leverage). For example, an account at 1:100 leverage would require $1,000 of margin to place a $100,000 trade.
By offering leverage to the trader, the brokerage is essentially allowing the trader to open a contractual position with considerably less initial capital outlay. Without leverage, a trader placing a standard lot trade in the market would need to post the full contract value of $100,000. With a leverage of 1:100, the trader can in fact open the position with an initial leverage of USD $1,000.