Margin trading is just another term for trading on borrowed money which is risky. The ratio of the borrowed money to the amount that you deposit (your risk capital), is termed leverage. These two concepts are closely related because you use the leverage ratio, and trade size to determine how risky the trade that you take is.

In example, if a trader deposits $1,000 to a forex broker, decides to trade $10,000 in a single transaction, the leverage of the account is 10:1. Yet it is possible to trade with higher leverage nominally. If for instance, you decided to set your leverage at 100:1, and traded the same $10,000 with a risk capital of merely $100 on the same $1,000 account, the effect would be the same as risking the entire account in the trade with 10:1 leverage. Please note that in the U.S. the maximum leverage is 50:1 for majors and 20:1 for minors.

The rule about leverage is that it should be kept low. Beginners are very far from possessing the sophistication necessary to implement high leverage correctly, and even with professionals, the risks involved in a high leverage transaction in a margin account often exceed any potential benefits. It is important to keep in mind that it is not the result of one trade that matters, but your overall performance at the end of the day. It is not unusual to gain great profits with a margin account in one or two trades, but it is almost certain that the losses in your losing positions will more than suffice to wipe out any gains that were made, and probably much more as forced liquidations (or margin calls) erode your account.

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