Leverage and Margin

Leverage is a loan provided to the trader by a broker and it's usually expressed in the form of a ratio. Usually if something costs 20000 euros, you need to pay the same amount of money for it - that's common sense but in forex trading you don't need to have the whole price of what you're purchasing; you only need to deposit some money to cover possible losses. The deposit you put up is what we call margin. The broker then lets you trade multiples of that margin which will allow you to make bigger returns relative to the margin invested. 

For example, let's say you buy $10000 of GBP/USD, you could just deposit $10000 and change it to pounds but with margin trading if you choose 1 to 10 leverage you only have to put one tenth of the total amount as margin which would cost you only $1000. If you choose one to 100 leverage you will need to put one hundredth of the $10000 which would be $100. So with the $100 margin you can trade as if you had actually invested $10000. 

With margin your losses are limited while your potential profits are unlimited. If you have a $1000 trading account to start after opening a $10000 position with a $100 margin you'd still have $900 in your account balance to enter new positions on other currency pairs. 

You can put up trades in other currency pairs which will drastically increase your chances of success. Without leverage a trader would need to come up with the entire $10000 capital on each trade. Leverage will allow the trader to take the same position with less capital. Leverage however can amplify both profits as well as loss.