In finance, leverage is borrowing money to supplement existing funds for investments in such a way that the potential positive or negative outcome is magnified and/or enhanced. Leverage is vitally important to your trading activities. Choosing the incorrect leverage could result in large losses and damage potential profits.
The amount of leverage on your account will in part determine the amount of funds you need to put up for a trade.
Units of base currency / leverage = margin requirement
A trade of 1.00 lot on the GBP/USD with a leverage of 1:500
1.00 lot = 100,000 units of base currency, so in this case 100,000GBP
100,000 / 500 = 200
The margin required for this trade is 200GBP
A trade of 1.00 lot on the GBP/USD with a leverage of 1:100
1.00 lot = 100,000 units of base currency, so in this case 100,000GBP
100,000 / 100 = 1000
The margin required for this trade is 1,000GBP
As you can see from these two examples the margin requirements differ significantly when trading the same volume but with a different leverage.
