Two very important aspects of Forex money management are leverage and margin. Leverage allows you to invest much more into currency trading than is available in your trading account. So you can operate larger funds. The margin is the real fund which is required to be held in your trading account as a collateral to cover any possible losses.
Profits and losses in the Forex market can be higher than what you would experience in the stock market even though the actual price of a currency may not fluctuate wildly. Most brokers allow a 100:1 leverage. This means that you can buy or sell €100,000 worth of a currency pair even though you have only €1,000 in your trading account. Some brokers offer a leverage as high as 400:1.
Leverage can also work against you: e.g. if a currency pair moves against your expectations the leverage would multiply your loss by the same factor as it would multiply the gain. A lot of people who begin Forex trading do not completely understand the concepts of leverage and margin. The Leverage appears to be a good service provided by brokers. You should have in mind that even a 1% fluctuation of a currency price could wipe out your complete capital depending on the amount of leverage which is offered by your Forex broker. So using a smaller leverage could help you to prevent lose too much capital too fast. So it is important for you to find the perfect balance.
In the example which is shown above it means when you buy €100,000 worth of currencies you are in fact borrowing €99,000 for your purchases. The €1,000 are used to cover your losses is the margin.
You may choose the highest leverage with the margin being only 0.5%. Money management principles say that you should never trade huge lots. This would prevent leverage from hurting your capital.
Therefore it is important for you to understand how much leverage your Forex broker offers and what the margin requirements are. If you are new to trading you should always compare the leverage and margin specifications of different brokers.