Understanding Forex Margin

Learn how to use leverage to speculate on currency prices or exchange rates. Understand the potential risks before deciding to trade forex on margin.


The foreign exchange (forex) market provides a way for various entities to buy, sell, and exchange currencies. The forex market includes banks, central banks, companies, firms, hedge funds, retail forex brokers, individual investors, and traders. As the largest financial market in the world, the forex market offers opportunities for hedging and speculating.
Much of the trading done in the forex market involves margin, also known as leverage. The use of leverage can boost an investor's buying power and flexibility, potentially amplifying gains in a forex position with only a relatively small amount of money invested. However, margin can also magnify losses that can include more than your initial investment. Understanding the dynamics of margin in forex trading can help qualified traders assess if the trading risk matches their tolerance.

Forex trading basics

The forex market involves trading two currencies against each other as a pair, effectively buying one currency and selling another at the same time. For example, a trade might include the U.S. dollar versus the Canadian dollar (USD/CAD) or the Japanese yen (USD/JPY). Sometimes, another currency is listed first, such as the euro versus the U.S. dollar (EUR/USD) and the British pound versus the U.S. dollar (GBP/USD). The base currency is the first listed in the pair, while the second-listed currency is considered the quote currency. 
A forex currency pair quote indicates the cost to convert one currency into the other. For example, it might require 1.10 U.S. dollars to buy one euro. At the same time, USD/CAD might trade close to 1.35, meaning one U.S. dollar is equal to 1.35 Canadian dollars. Quotes can change several times throughout the day. 
A pip (short for percentage of a point) is the minimum price fluctuation in a currency pair. It's often taken out four decimal places. For most pairs, the pip is 0.0001 (except for JPY pairs, in which the pip is 0.01). Most currencies are traded in lots through brokers known as forex dealer members at two different sizes: standard lots (100,000 units of a currency) and mini lots (10,000 units).