There are several methods to apply leverage through which you can raise the actual purchasing power of your investment, and Forex margin trading is one of them. This method basically enables you to control huge amounts of money by using just a small sum. Generally, currency values won’t rise or drop over a certain percentage within a set time frame, and this is why is this method viable. In practice, it is possible to trade on the margin by using just a small amount, which may cover the difference between your current price and the possible future lowest value, practically loaning the difference from your own broker.
The concept behind Forex margin trading can be encountered in futures or trading as well. However, due to the particularities of the exchange market, your leverage will undoubtedly be far greater when dealing with currencies. You can control around up to 200 times your actual balance – of course, according to the terms imposed by your broker. Needless to say that this may enable you to turn big profits, however you are also risking more. As a rule of the thumb, the risk factor increases as you use more leverage.
To give you a good example of leverage, think about the following scenario:

The going exchange rate between your pound sterling and the U.S. dollar is GBP/USD 1.71 ($1.71 for one pound sterling). You’re expecting the relative value of the U.S. dollar to go up, and buy $100,000. A couple of days later, the going rate is GBP/USD 1.66 – the pound sterling has dropped, and one pound is now worth only $1.66. If you were to trade your dollars back for pounds, you would obtain 2.9% of one’s investment as profit (less the spread); that’s, a $2,900 benefit from the transaction.
In reality, it is unlikely that you are trading six digit amounts – many people just can’t afford to trade with this scale. And this is where we can use the principle behind Forex margin trading. You only need to provide the amount which would cover the losses if the dollar would have dropped instead of rising in the last example – if you have the $2,900 in your account, the broker will guarantee the rest of the $97,100 for the purchase.
Currently, many brokers cope with limited risk amounts – which means that they handle accounts which automatically stop the trades if you have lost your funds, effectively avoiding the trader from losing more than they will have through disastrous margin calls.
This Forex margin trading method of using leverage is quite common in forex trading nowadays. It’s very likely that you’ll do it in the near future without so much as a single considered it – however, you should always take into account the high risks of a lot of leverage, and it is recommended that you never utilize the maximum margin allowed by your broker.