Even though the meaning and concept of leverage is simple, things are often made complicated or get lost in the world of forex markets. There are misconceptions and they usually arise as a result of the interchangeable use of the words, "leverage" and "margin." Though these two words are related, they cannot be expected to be interchangeable except in the rarest-of-rare cases when a forex trader opts for making use of the maximum leverage available to him as per terms and conditions of the forex broker.

Let us read about some common concepts of forex trading to create and maintain a clear, complete understanding so that all of us are on the same knowledge platform.

Leverage (trading accounts): The use of borrowed funds or credit for increasing speculative capacity of a forex trader and increasing the return on investments, as in purchasing securities on margin, which can even lead to increase in losses is leverage. The leverage of a forex trader is dependent upon the size of trades relative to his account equity as long as the maximum leverage offered by the forex broker is not surpassed. The value of leverage is usually shown as a Debt: Equity ratio.

Margin: Margin is the collateral amount deposited by a forex trader while borrowing from the broker for purchasing securities. It can be described as the account balance with which a forex trading account is opened.

Margin requirement: It is established by the broker, in terms of percentage, for safeguarding itself against forex traders who often indulge into too much leverage. In other words, margin requirement can be classified as risk management parameters against borrowings of traders putting more than their collateral. This means that if the margin requirement of a trader is 1 percent, the forex broker requires them to submit 1 percent of the trade size for facilitating borrowings required for the trade. This means that if you are trading for a $200,000 position size, the broker expects a 1 percent of your margin ($2000) in order to provide the loan. In simple words, the maximum leverage for your account according to their margin requirement is 100:1.

It will also be worthwhile to note here that the forex broker does not establish leverage of its forex traders. The forex broker establishes maximum leverage and the onus of how much of this leverage is to be used in trades is all on the forex trader. The leverage is nothing to be worried much about as most forex traders make use of far less than the maximum allowed by their forex broker. This means that there is nothing for you to worry about when it comes to leverage options such as 400:1 or 100:1, as you will hardly come across them.

We hope that this information on calculation of leverage in forex market was helpful to you and you will be able to make better and more informed decisions from now onwards. Remember, it is your investment and you have every right to ask for more information if there are any second thoughts.