Leverage is the ability of a forex trader to control large sums of a currency without posting an equivalent amount of capital. Essentially, a trader puts a small amount of capital down (margin) and borrows the rest to control the position. Leverage in the forex market is among the highest in the investing world, with 200:1 not uncommon. This means a trader can control 200 currency units for every unit of capital posted.
Leverage allows a trader to increase the size of his trade many times over. With $1000 and 50 times leverage, a trader can control $50,000 worth of currency. This means any gain or loss is also magnified by the same amount. Leverage can be a double-edged sword for traders in that it is great for turning profitable trades into very profitable trades, but quickly burns up an account if the trend turns against the position.
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